While shopping for car insurance, you are always looking to compare the coverage and premiums. Like any smart consumer, you look for gaps and get the policy that best suits your needs at a premium you can afford. If you bought the car new from a dealer, you probably financed. Or you may have financed a new to you car. Either way, financing means you have to buy comprehensive car insurance coverage.
Did you know that comprehensive does not pay as much as you think once the car drives off the lot? It is true, after the first mile away from the dealer the true market value (TMV) of the car is down by almost 9%. After the first year, the TMV is another 15 to 20% less. That means after a year its value is about 80% of what you paid for it. After two years, it depreciates down to a little less than 70% of what you paid. Unfortunately, unless you financed it for four years, you will have to pay the bank (out of your pocket) the difference between the TMV and what you owe on the loan.
For example, you buy a new sporty coupe, your dream car. The car cost 30000. It's a 5-year loan, at 4.4% interest. That means your total loan is $33476. If someone steals your car and totals it at the end of your first year, comprehensive is going to pay the TMV, which is about 81% of $30000, or $24300. Nevertheless, the bank or the finance company will want you to continue to pay off the loan. At the end of year one you have a loan balance of $26,781. That's almost $2500 difference. You have a couple of choices. Continue to make the payments on the car you no longer have and use the insurance money to buy a car outright that is no more than $26,500. Or, use the insurance money to pay the finance company plus pay the differential from your savings, and finance another car.
Or, when you were choosing a policy comparing car insurance quotes, you check out getting a Gap policy to cover the gap between your loan and the TMV for the first couple of years of the loan. You only need gap insurance for the first couple of years of financing, after that the TMV either equals of is more than the loan balance for the average car.