New Car? Consider Loan Payoff Insurance Coverage

When you take out an auto loan, you take a gamble on being able to pay it back. You take the gamble that your car will survive the life of the loan, and that it won't be stolen six weeks after you buy it. Loan payoff insurance coverage mitigates that gamble, at least to some extent.

Also called GAP insurance, loan payoff insurance coverage helps reduce the financial burden of being upside down on a car note. In other words, if you owe more money on the car than it is worth, you can purchase additional insurance to cover that disparity. That way, if your vehicle is damaged beyond repair or stolen, or otherwise considered a total loss, you won't have to pay the balance left on your auto loan.

A Great Deal Might Be Anything But

A friend of mine bought a car over the Christmas holidays, timing his purchase so it coincided with the myriad deals on vehicles and financing the dealerships run that time of year. He was excited to discover that his payments every month would be much less than he'd expected.

He added loan payoff insurance coverage to the car, however, which increased his premiums somewhat. The added expense was worth it to him because, with the low payments, it would take him longer to get over the "hump" of depreciation as the car aged.

Most people realize that cars depreciate as soon as their tires touch the road, but many don't realize the true extent of that depreciation. It is entirely possible to buy a new car and automatically owe more on it than it's worth. If you don't make a significant down payment, loan payoff insurance coverage is a must.

Assessing New Car Insurance Needs

Everyone doesn't need loan payoff insurance coverage. If you make a healthy down payment and pay off your new car quickly, that additional coverage might be superfluous. The only way to know, however, is to keep track of how much your vehicle is worth compared to what you owe.

Every month, you should get statements from the financing company showing what you've paid and how much you have left to cover. Armed with this knowledge, check the Kelley Blue Book value of your vehicle every couple months to keep on top of things. If you owe more than the blue-book value, consider buying loan payoff insurance.

Evaluating Your Options

In order to purchase loan payoff insurance coverage, you must be eligible for it based on your insurance company's requirements. According to CarInsurance.com, you must have purchased both collision and comprehensive coverage in order to buy loan payoff coverage. Furthermore, there must be a lien on the car by your financing company. If you're financing through a private party, such as a parent, it won't be applicable.

Loan payoff insurance coverage is not necessary in all situations, but it helps to know your options. As soon as you buy a new car, determine whether GAP insurance is needed to cover the vehicle in case of a total loss, then continue evaluating your needs every few months until the loan is paid off.