It’s a simple fact that a new vehicle starts to depreciate in value the moment it leaves the lot.
When financing a new car the market value of the vehicle will likely be less than what you owe on your loan. Simply put: what you owe on your vehicle’s loan is more than the vehicle is worth. Standard auto insurance policies will only cover the depreciated value of the car, or, the market value.
This means that, in the event of an accident that totals your car, the insurance company will pay you based on the market value of the vehicle. What happens if this market value is less than your loan amount? Well, in that case you’ll be on the hook to pay the difference EVEN IF the vehicle is no longer drivable. This difference in the market value and the loan amount is called the financial gap.
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