The vehicle insurance policy that you take for your buying a vehicle might seem to be comprehensive but truly does not cover the full value of the vehicle. Being aware of this fact might prevent future shocks when you discover at a later date that the payment offered to you by the insurance company is far less than the actual value of the vehicle. It can be summed that vehicle insurance does not give complete financial protection to you.
It might sound a bit weird, but the laws of accounting are such that assets rapidly lose its value during use. The maximum compensation that you receive is the market value of the vehicle that has been worked out by factoring an average annual depreciation rate of 15 to 20 percent that is counted from the moment the vehicle moves out from the showroom.
Increase the protection
Since the vehicle insurance policy that you have is not sufficient to cover the actual value of the vehicle, you have to take up an additional insurance policy so that both together will make it up. This additional insurance is known as GAP insurance and is widely prevalent in the motor industry.
As a vehicle owner, you too have to be aware about it so that all financial liabilities related to the vehicle is adequately covered by insurance. Even if the insurer writes off the vehicle, you need not worry about clearing pending loans as it is paid by the insurance company.
Other reasons for the gap
It would be wrong to think that it is only due depreciation that the valuation of vehicles by insurance companies gets affected. There are some other factors related to borrowing patterns that can increase the gap between the market value of the vehicle and the outstanding loan amount that can result in negative equity of the vehicle, which is an indicator for taking additional insurance cover.
- Least down payment – Many would prefer to get the maximum amount of loan for purchasing a vehicle. In such cases, there is a drastic reduction in the value of the vehicle as soon as it is “on road” that widens the gap between the actual value and the market value. And the longer the vehicle is used, bigger is the gap.
- Longer loan tenure – Taking a loan for much extended period might ease monthly repayments that are lower but it can also slow down the process of equity building for the vehicle that has high chances of developing negative equity very soon.
- More borrowings – The less you borrow the better are the chances of avoiding negative equity for vehicles. Borrowing added sum to cover for taxes, registration, licence, extended warranties etc would make the vehicle easily vulnerable to negative equity when you owe more than the worth of the vehicle.
Negative equities are hard to avoid unless you purchase the vehicle with own cash, but getting a GAP insurance can correct the situation to your satisfaction in the event of a write off.