Buying a new car is exciting, but once you drive off the lot, you immediately put yourself and your new possession at risk of accidents and countless other threats. With a new car, especially, you might have to face a huge financial blow just because a significant amount of value was lost in an accident. Plus, you might also find yourself facing a nearly full auto loan that you’re still obligated to pay, even though the vehicle it covers is a complete loss. 

Standard auto insurance alone often will not cover the full value of a new car if you total it soon after you buy it, and this could limit your ability to pay off your loan. Fortunately, an extra form of protection called gap coverage will come in handy in these cases. 

How Does a Car’s Value Change? 
Any used item is not worth as much money as one that is brand new. Cars are no exception. As soon as you drive your car off the lot, it will depreciate. No matter how “new” it is to you, your car becomes used the moment you start to drive it. Vehicles depreciate quite quickly at first, and some lose up to 20% of their value during the first year of ownership.  

Still, the car’s used value (its cash value) will not necessarily represent the amount of money you owe on it. Even as your car’s value depreciates, the loan’s value stays the same as you work to pay it off. The loan still reflects a cost burden to the owner. 

Gap Insurance for Newer Cars 
On their own, your auto insurance policy’s physical damage insurance (collision, comprehensive coverage) might not compensate you for the full value of either a like-new vehicle or the value of your loan on the financed car. Insurers usually only compensate you based on the car’s cash value at the time an accident occurs. 

However, if you total your car, and you still have it financed, then the loan doesn’t go away. So, if your auto policy only covers you based on the car’s cash value, then you still might struggle to pay off the remaining loan value. However, if you add gap insurance to your auto plan, then you will be able to file a claim for the value of the outstanding loan. This is called gap insurance because it helps you pay off the difference between your car's cash value and the value of the loan. Therefore, you’ll be able to clear this car note that you realistically no longer need. 

All in all, gap insurance is an amazing benefit that you should consider adding to your auto policy, particularly when you buy a new car.