Purchasing Cheap Car Insurance

How to Insure a Brand New Car

Purchasing a brand-new vehicle can be an exciting and exhilarating experience for sure. The adventure of test driving your favorite models, the excitement of choosing your options, the anticipation of waiting for delivery day – these all add up to a most enjoyable experience for all of us. But the one thing that can dampen the new car buying experience is the insurance bill. Individuals who have never purchased a brand-new car before are often shocked when their expectations of cheap car insurance are not realized.

New cars purchased using a loan cost more to insure because you are required to protect the bank’s interest as well as your own. In other words, any bank that loans you money has to protect itself against financial loss. So it will require you to purchase extra insurance coverage. If you refuse that coverage they have the legal right to purchase a policy themselves and include the cost in your monthly payments.

There are two extra coverages that are typically a mandatory as well as two additional coverages that are optional.

They are:

• collision coverage
• comprehensive coverage
• fire and theft (optional)
• gap insurance (optional)

The Requirements for Cheap Car Insurance

When the bank loans you money for a car it trusts you to pay that money back within the agreed-upon amount of time. But what happens if you total the vehicle in an accident a year or so after you purchased it? If all you had was cheap car insurance covering only minimum liability, you would be left without a car but still holding a loan with a significant outstanding balance. Furthermore, the bank would have no vehicle to repossess should you default on your payments.

If you think about it such a circumstance would open the door wide open for people to simply stop paying their car loans after an accident. Therefore, they require you to carry collision coverage to prevent that from happening.

If you total your vehicle and have collision coverage, your insurance company will replace it at the current Kelly Blue Book or NADA value. You continue making payments on your loan and everyone’s happy. Should you decide to stop paying, the bank still has your new car to repossess in order to recover its investment. And by the way, comprehensive insurance works the same way.

The Difference between Collision and Comprehensive

Many people don’t understand that collision insurance and comprehensive insurance are two different animals. Collision insurance pays for damage to your vehicle as the result of a crash. Covered accidents include those that occur on public roadways, in parking lots, and even on private property in some cases. Comprehensive coverage takes care of damage caused by just about anything else. For example, if a severe thunderstorm sends that 100-year-old white oak crashing into your car, your comprehensive coverage takes care of it. The only possible exception to this rule would be fire and theft.

As a general rule banks will require you to carry both comprehensive and collision in order to eliminate most of their risk for loss. Fire and theft insurance might be required if your comprehensive policy does not cover such events, or covers them inadequately. Regardless, all three types of extra coverage can be dropped once you pay off your loan entirely. You may not want to, depending on the value of your car, but it is a possibility.

Gap Insurance

Gap insurance is a relatively new product which was developed in response to the increasing cost of brand-new vehicles. It is designed to cover the difference between what your car is worth on the open market and what you still owe on your bank loan. Without gap coverage, a totaled vehicle could leave you with a substantial bill to pay if your car insurance company’s reimbursement check is not as much as what you still owe. Let’s use a brand-new $20,000 vehicle as an example.

The most recent statistical data indicates that a brand-new car loses 5% to 10% of its value the moment you drive off the lot. That’s because the dealer built-in extra value to cover his overhead costs and pay his salesman. But once you drive that car away those extra costs disappear. Furthermore, a brand-new car loses between 15% and 20% of its value within the first year of ownership. That means your $20,000 vehicle will only be worth $16,000 on its first anniversary.

Let’s just say you’re in an accident that totaled your vehicle one year after you purchased it. Your insurance company will write you a check for $16,000 even though your outstanding balance on the loan might be $18,500. If you don’t have gap insurance you will be required to cover that $1,500 from your own resources. However, if you do have gap insurance your carrier writes a check to the bank for you.

It’s easy to see how important gap insurance is when you consider the retail cost of new cars as opposed to their street value after just one year of depreciation.

Consider Insurance Costs When Buying a New Car

None of us likes to think about insurance when it comes time to buy a new car. Most of us plan to investigate cheap car insurance quotes later on, under the assumption that even if we don’t find them it’s still worth paying more if it means a new vehicle and driveway. This probably isn’t the wisest course of action. You should always figure in car insurance premiums when determining the total cost of ownership of a new vehicle. It would be a shame if expensive insurance pushed the car beyond your ability to pay and thus resulted in repossession.

There are a few other factors that go into determining car insurance premiums for new vehicles. Suffice it to say that if you’re expecting cheap car insurance on a brand-new vehicle it’s not going to happen. New cars cost more to own than used ones; that’s true for everything from maintenance and repairs to insurance.