This article has been updated from a previous version.
A new vehicle starts to lose its value as soon as you drive it off the dealership lot (by about 25% in the first year), creating a gap between the car’s worth and how much money you still owe on it. Suppose your car is damaged or a total loss because of a collision or theft, and the settlement you get from your insurance provider is less than the outstanding balance on the loan. In that case, you may find yourself in what’s known as a negative equity position. That means your car is worth less than your loan.
When buying a new vehicle, auto dealerships may offer you what’s known as gap (guaranteed asset protection) insurance. It’s an optional form of protection designed to safeguard your purchase from depreciation if the vehicle is stolen or totalled in a collision. Gap insurance can help you pay off your auto loan should you owe more money on it than its actual cash value. But do you need it?
Considering the average price of a new vehicle in Canada is around $44,000, gap insurance may make a lot of sense, particularly if you don’t pay a hefty down payment on it and choose to finance your vehicle over a long period of time.
When did gap insurance become common?
There was a time when the typical auto loan term was about five years. However, when automakers and dealerships started offering longer-term auto loans of up to eight years following the 2008 financial crisis, it changed how consumers buy new cars.
For automakers, the problem was that consumers wouldn’t be eager to purchase a new vehicle again for longer periods of time. The auto industry’s answer was to entice customers to come back sooner. Dealerships encouraged drivers to trade-in their vehicles before paying off their existing loans and roll the outstanding balance they owed into a new low-interest rate loan to finance an upgrade.
Adding gap insurance to your new vehicle purchase can provide you with peace of mind if your car is wrecked beyond repair, you don’t have a limited waiver of depreciation on the policy, or if the payout you get from your insurance company isn’t enough to pay the balance on your auto loan.
What is the difference between gap insurance and a waiver of depreciation?
Most car insurance providers in Ontario and Alberta can add an endorsement on your policy that provides the same level of coverage as gap insurance and at a lesser cost. In Ontario, that endorsement can be acquired with an Ontario Policy Change Form (OPCF) 43 — commonly known as a limited waiver of depreciation (OPCF 43A is for drivers who lease a vehicle). In Alberta, it’s referred to as a Standard Endorsement Form (SEF) 43R.
Both forms remove your insurance provider’s right to deduct depreciation from the value of your vehicle when settling a claim for loss or damage caused by theft or a collision. Usually, both endorsements only apply to new vehicles purchased within the last 24 to 48 months.
Determining whether you should buy gap insurance or add a limited waiver of deprecation to your policy comes down to dollars and cents — and the length of your auto loan financing agreement. It may be cheaper to ask your insurance provider to add a waiver of depreciation to your policy than buying the dealership’s gap coverage since the provider’s endorsement usually costs only a few dollars per month.
Talk to your car insurance provider or broker about which option suits your new vehicle investment best. If you choose to go with an endorsement from an insurance company, make sure to shop around for the lowest auto insurance rate first. That way you know you’re with the most affordable provider for you.
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