I enjoy learning about these systems to buy things you cannot afford. I assume this is because the remaining principle on the loan is greater than the purchase price minus depreciation?
There can be a gap between the amount of the loan and what the insurance will pay out for a totaled car. This type of insurance covers that gap, hence the name.
There are a number of factors why the loan might be higher than the payout. In general, if you need gap insurance you are likely overextended.
Not really. Cars devalue the second you drive them off the lot because it goes from new to used. A totaled car under insurance would get you the cost of a used car, because thats what your car is, even if you just bought it that week. The gap covers the value between new and used. Still a giant scam though.
It’s insurance if you total your brand new car youre paying off , so you don’t end up with no car and -45k+ in debt (having to pay off a car that’s now totaled and being scrapped), annnddd need a new car . If you have gap insurance and total ur car, your old car gets paid off and you’re at null again, or you have a couple extra thousand to throw on a new car. I learned this the hard way after getting tboned in an intersection the 2nd day I had my brand new Subaru and not understanding why insurance wasn’t covering it…🤦🏻♀️ but it’s a huge scam, but unfortunately it’s one that we have implemented into society here, just like many other scams…
In the US? Yeah absolutely, people will buy way outside of their means and take out a 72 month loan at like, 6+% APR just to look I dunno, rich to their neighbors? It's weird. GAP gives them a safety net I guess if bad things happen but still, it shouldn't be necessary.
It absolutely is! But outside of owning a home, which for most people is LOL yeah right, their only lizard brain symbol of status is what they are driving around town, so people fall for the trap.
And that comes into play here too, but usually your car is like, the -hint- at job status without saying it first for men. "Oh he drives a nice car he must be well off," which is of course not always the case most of the time, here.
editing to say: people here are very status-y and judgmental and...... I mean we are where all of the memes of "if you don't make 200k/yr and are over 6 ft tall you aren't worth dating" come from, it's gross.
Ah in my society the white collar jobs are in the city. So you catch public transport. People will own fancy cars but it's not a way to show off to strangers. Maybe to your friends on the weekend.
I could very much afford my vehicle and still got gap insurance. Gap is like $10/month and cars depreciate crazy fast. It loses like $5k the second you drive it off the lot. I don’t want to be saddled with paying off that difference if some idiot in a shitbox totals my car after a month.
So say you get a loan from the bank for $30k for the vehicle. You drive the car for 3 months and still owe $28k on it. The car is only worth $25k now though. You get into an accident and the car is totaled. If you don’t have gap insurance, your insurance will only pay out what the car is worth ($25k). You still owe the difference ($3k) to the bank. If you don’t have gap insurance then you have to pay that $3k out of pocket. Gap insurance is especially useful if you have a longer loan term (60+ months) because it’s highly likely that the car is going to depreciate faster than you’re paying it off.
Taking a loan doesn’t mean you can’t afford a car….there are multiple reasons to finance a vehicle vs paying cash.
Manufacturer incentives often don’t apply if you pay cash so you end up paying a higher price up front.
If interest rates are below ~5% then you are better off financing the vehicle because you can reliably get 5%+ returns with your cash in an SP500 ETF over the life of the loan.
Even if you have the cash up front to buy a vehicle but you don’t want to deplete savings in the event of an unforeseen circumstance (job loss, health issue, natural disaster) you can use the loan to spread the burden out over time and put your savings into an ETF/CD/other financial vehicle that will cover the cost of interest but also leave you liquid.
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u/Maximum-Cupcake-7193 8d ago
I enjoy learning about these systems to buy things you cannot afford. I assume this is because the remaining principle on the loan is greater than the purchase price minus depreciation?