Ins and Outs of Car Depreciation

With respect to insurance terminology, car depreciation is defined as the loss of value of the car that happens with time. This is so because each and every part of the car undergoes wear and tear with usage that leads to the overall loss of value of the car. This plays out while buying a car, especially a used one as the rate of depreciation of the car comes into picture for the car insurance. The older the car, the higher the rate of depreciation is. Deprecation is applicable even on new cars as it comes into play the moment you drive it out of the showroom. Every day adds to this and this is what affects the re-sale value of the car as well. Loan, Insurance and Depreciation - What's the link? Most people also avail a loan to finance their cars. At times it is possible that the value of the car may be much less than the financed amount over the loan tenure. In such cases you are actually exposed to a situation wherein you may end up owing far more in the event of any collision or wreck happening. In other words your car insurance may not cover the total payout required in the event of a total loss happening. The Solution – Gap Insurance Gap insurance is taken to avoid a loss in situations like the ones mentioned above. In other words it is taken to cover the gap between what your insurance company pays out and what you actually owe on your car loan in the event of a total mishap happening. This is basically taken to protect your interests so that you don't end up spending from your pockets on the car for the difference amount. Depreciation and Gap Insurance So, the next question is whether all cars need gap insurance. Not really, not all cars and loans need gap insurance. However, there are few situations where it becomes imperative in your best interests to get one and it's always linked to the depreciation. 1. It is obvious that if you have purchased a vehicle with a high rate of depreciation, then you need to go in for gap insurance. The high rate of depreciation will ensure that your car value goes down further as you use it and in the event of a totality, you will be safe. 2. If you drive your car a lot regularly, then it may be better to take a gap insurance as the more your drive, the more the depreciation is. 3. If your loan pay off tenure is longer than say four years or so, then a gap insurance can be highly beneficial to you since the longer the tenure, the higher the depreciation rate will be. Typically gap insurance costs you approximately 5% of the annual insurance premium of a comprehensive and collision coverage. However they can vary based on factors like the value of the car, the location etc. Though gap insurance is not a must all car purchases, if you decide to finance your car purchase, then check out the depreciation rates on the car insurance and work out the pros and cons. This can help you figure out if the gap insurance can help you cover the difference amount between the insurance payout and the value of the car with depreciation taken into account.