Buying a new vehicle can be very exciting. I remember purchasing my first brand new vehicle. Ahh, that new car smell.
Today the average new car costs about $36,000. According to a recent Edmunds.com report, the average car loan is 69.2 months. That’s almost six years. Data also suggests that 84-month loans have increased significantly over the last several years.
Unfortunately, bigger and longer-term loans don’t have an impact on vehicle depreciation. Carfax.com showed the current depreciation value of new vehicles might drop by more than 20% in the first 12 months of ownership. Trusted Choice indicates some vehicles could depreciate as much as 30% the first year; 11% of that occurs the moment you drive off the lot.
Depreciation can be a major factor if a vehicle is totaled after an accident. And it could leave you stuck with a loan for a vehicle you can no longer drive. This is because most auto policies have “Actual Cash Value” (ACV) coverage. For instance, let’s say that a $36,000 car depreciates 11% the moment you drive off the lot. Now it’s worth only $32,040. If your car is totaled in a loss, insurance will only cover the actual cash value, or $32,040. But if your loan is still $36,000, you’ll have to pay the difference of $3,960 out of your own pocket.
Naturally, people aren’t happy in situations like these; many don’t realize how quickly vehicles depreciate. Fortunately, there’s a way to remedy this situation.
West Bend’s Home and Highway® policy offers “Auto Loan Lease” coverage to fill that gap, as do many dealerships. This is a great product to purchase, especially if you don’t have a big down payment on the new purchase. In addition, companies offer a time threshold in which to purchase this coverage. So, the next time you buy a vehicle and need a loan to do it, think about purchasing Auto Loan Lease or gap coverage. It could be one of the best insurance investments you make.
Do you have any tips or information you’d like to share? I’d love to hear them; please share them in the box below.
Author Bio: Nick Unger is a senior Personal Lines underwriter who has been with West Bend for 10 years. He was also an agent for 5 years. He enjoys bow hunting, baseball, football and spending time with his family. His true passion is coaching and watching his son play baseball and soccer.