A Gap in Your Teeth is Sexy - But Not in Your Car Insurance
Unless you pay cash for your new car, or make a substantial down payment, odds are your car loan is "upside down" the minute you drive off the dealer's lot.
An "upside down" loan simply means the amount borrowed to purchase an asset like an automobile exceeds the value of the asset itself.
Most recently, you've probably heard the term used to describe the hundreds of thousands of mortgages now in default.
Unlike a home, the value of an automobile at any point in its life is predetermined by a depreciation schedule that takes into account make, model, year, equipment, and mileage.
Without exception, every new car, SUV, van, or motorcycle loses 15% - 20% of its value the moment it makes the short drive from the dealer's lot onto the street.
At this point, the only thought running through a new car buyer's head is who she's going to show it to first.
The last thing on her, or any other new car buyer's mind is that they just lost a fast $6,000 in equity on their newly purchased asset.
For anyone who paid cash, made a substantial down payment, or received a very generous trade-in, the potential problem of rapid first year depreciation will not pose a financial hardship.
But for any new or used car buyer who made a very low down payment or accepted a zero cash down offer from the dealer the potential for financial disaster looms large.
Anyone who makes a minimal down payment and has their car stolen or totaled in an accident during the first year of ownership unknowingly faces a shortfall of thousands of dollars owed to the finance company after the insurance company settles the claim.
The difference between the amount the insurance company pays for a total loss and the payoff amount of your loan is the gap covered by GAP (Guaranteed Asset Protection) insurance.
An "upside down" loan simply means the amount borrowed to purchase an asset like an automobile exceeds the value of the asset itself.
Most recently, you've probably heard the term used to describe the hundreds of thousands of mortgages now in default.
Unlike a home, the value of an automobile at any point in its life is predetermined by a depreciation schedule that takes into account make, model, year, equipment, and mileage.
Without exception, every new car, SUV, van, or motorcycle loses 15% - 20% of its value the moment it makes the short drive from the dealer's lot onto the street.
At this point, the only thought running through a new car buyer's head is who she's going to show it to first.
The last thing on her, or any other new car buyer's mind is that they just lost a fast $6,000 in equity on their newly purchased asset.
For anyone who paid cash, made a substantial down payment, or received a very generous trade-in, the potential problem of rapid first year depreciation will not pose a financial hardship.
But for any new or used car buyer who made a very low down payment or accepted a zero cash down offer from the dealer the potential for financial disaster looms large.
Anyone who makes a minimal down payment and has their car stolen or totaled in an accident during the first year of ownership unknowingly faces a shortfall of thousands of dollars owed to the finance company after the insurance company settles the claim.
The difference between the amount the insurance company pays for a total loss and the payoff amount of your loan is the gap covered by GAP (Guaranteed Asset Protection) insurance.
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