Are you underwater in your car? No, this isn’t about flooded vehicles, although that’s a problem, too. It’s about owing more on a car than it’s worth. Because of depreciation, it’s a common situation, and one that could leave you in debt and without a car.

Gap insurance can help, but deciding whether or not it’s worth the cost requires some careful consideration.

How fast do cars depreciate?

According to Cars Direct, most new cars depreciate in value by about 10 percent as soon as you drive them off the lot. Over the first year, they depreciate about 19 percent. In the second and third years, they depreciate 15 percent.

Think about that. If you buy a new vehicle at $40,000, it’s lost $4,000 in value by the time you get it home.

Why does depreciation matter?

Depreciation is an obvious problem if you’re planning to trade in your car a couple of years after you buy it. If you’re planning to keep your car for a long time, you might not think it matters. Unfortunately, it can.

Let’s say another driver hits your car. The car is totaled. The crash was the other driver’s fault, so his insurer cuts you a check. You think everything’s been resolved – until you see the check. It’s several thousand dollars less than you expected.

Or let’s say your car is stolen. If you have comprehensive coverage, your insurer will give you a payout – but it might not come close to what you paid for the car.

If this happens, you can blame depreciation. The value of your car has dropped sharply since you bought it, and this is what the insurer is offering you.

It can come as an unwelcome surprise. Even worse, it can leave you in debt. Imagine owing $20,000 on a car and only getting an insurance payout of $15,000. You’d be left owing $5,000 on a car you don’t even have anymore. This is what happens when your car loan is underwater.

It’s also why some people get gap insurance, which covers the difference between what your car is worth and what you owe.

Do you need gap insurance?

No one wants to pay for coverage they don’t need. To determine whether gap insurance is right for you, determine whether the following situations apply.

  • You have a car loan or lease a car. Gap insurance helps you pay off debt after your car is totaled or stolen, so it makes sense to carry it if you have a car loan or are leasing a car.
  • Your car is less than a few years old. Cars depreciate a lot during the first few years, so gap insurance is most important during this time. However, depending on how much you owe, you may want to keep coverage for longer.
  • You made a small down payment or have a long repayment period. The smaller your down payment is, the more likely it is that you owe more money than your car is currently worth. Similarly, a long repayment period can put your car loan underwater.
  • You owe more than your car is worth. Compare the value of your car to your outstanding balance. To predict how much your car might depreciate, use the Omni Car Depreciation Calculator. Keep in mind that certain things, like driving your car a lot or failing to keep it maintained, can make your car depreciate faster.

Pronto does not sell gap insurance, but we do sell great auto insurance. Find out how much you can save with Pronto by getting an online auto insurance quote now.