Do you really need car gap insurance?

Last updated on November 25th, 2021 at 02:46 pm by Bill Tsouvalas

This is something we will all probably ask ourselves at some point. The thing is, nobody wants to fork out money unnecessarily, especially when budgets are tight and we have to watch our spending. You are already paying for a new car and its insurance, is it really worth adding another expense to your budget?

Depreciation on your vehicle

The unfortunate truth is that your cars value depreciates as soon as you drive it out of the dealership.

As The Dog and Lemon reported, in Australia a new car loses about 15% of its value per year in the first three years. After three years, the average car will be worth just 60% of its original value so, if your car cost $100,000, it will now only be worth $60,000.

Regardless of how great your insurance may be, the chances are you will lose money if your new car is written off or stolen. This is because your insurance pays out the current value of your car, not the original cost and, because the value of your vehicle drops so quickly, if you were to claim from insurance, the pay-out will not be what you initially paid for the car.

It will not be possible for you to purchase another vehicle of the equivalent price.

This is where gap insurance comes in. It will cover the difference between what your insurers paid out and what you either paid on your car or what you still owe on it.

Should you get gap cover?

You are less likely to need gap cover if you own your car, or at the very least own substantial equity on it. However, taking out gap insurance could benefit you if:

  • You are buying or leasing a new car
  • The vehicle you are purchasing is expensive or you’d be unable to replace it
  • Your down payment was small
  • You would not be able to afford the amount between what you owe on the vehicle and its actual cash value
  • You are paying off the vehicle for a substantial period of time

On the other hand, if your car is less than a year old and you have a fully comprehensive insurance plan that offers a ‘new car replacement’ then you won’t need gap insurance.

Get the best deal

It won’t hurt to shop around before committing to a car gap insurance plan. Most dealers will try to sell you their option and work it into the loan however, this is generally more expensive and you could end up paying added interest on the insurance. This could add up to a substantial amount over the years.

Major insurance companies tend to offer the same cover for a much lower price. The bonus is that many offer the option of dropping the coverage as you build equity on your car. Just make sure you read the terms of your policy over carefully to ensure if reflects your needs.

Case study

In a study conducted by the Australian Securities and Investments Commission, entitled “Buying Add-On Insurance in Car Yards: Why It Can Be Hard to Say No”, researchers noted that, when buying a new vehicle, most consumers opted to pay for insurance through the car loan. The study pointed out that, when taking this option, “it can be difficult for consumers to understand the cost of the insurance they have purchased and consumers will pay interest on their insurance premiums for the life of the policy/loan, which they may not otherwise do.”

As a result, this will increases the amount that they will pay for the insurance overall. Interviewing a number of consumers, the study recalled how one man thought he was paying $1,200 for his insurance only to discover he was paying closer to $1,900.

“Despite having an individual invoice for these products, he was under the impression that the invoice did not reflect the accurate price based on his recall of the discussion with the salesperson,” the study reported.

“On reviewing his invoice, he noticed the difference in cost and no longer thought he had obtained a good deal. ‘It looks like the gap insurance was the full $749. My understanding was … I guess my memory wasn’t as good as I thought it was, or my understanding anyway.’”