It is not hard for a driver to owe a lender or leasing company more money than the car is worth when it was new. At least until your monthly payments accumulate sufficient equity in the vehicle, a low down payment and a lengthy loan or lease period are sufficient.
Equity must equal the vehicle’s current value when filing claims and valuing it. If the car is damaged, your regular insurance will compensate you based on that value, not the price you paid.
The issue is that automobiles quickly depreciate during their first few years on the road. In point of fact, the typical automobile loses 10% of its value within the first month of ownership.
2 In the event of a collision, your insurance policy will not cover the cost of purchasing a new vehicle. You will receive a check for the price of a car that is comparable to yours on a used car lot. This is known as the vehicle’s actual cash value by insurers.
That gap is not covered by gap insurance. Because the payouts are based on actual cash value rather than replacement value, you may experience fewer monetary losses.
