Car Buying ~ The Secret to Buying New Cars and Gap Insurance
Car Buying ~ The Secret to Buying New Cars and Gap Insurance
While thinking about what I wanted to write about, my mind keeps drifting back to auto loans. Primarily, buying new cars and Gap Insurance. Which makes me think of two very important things. New cars and Gap Insurance. Each of these are important when looking for a vehicle.
~To Buy or Not To Buy ~ New or Used ~ Gap or No Gap ~
Deciding to buy new or used is either an easy, or perhaps hard decision. I’m a HUGE believer in buying used. That is not to say I will not buy a new car. IF a new car is purchased the vehicle should be one that will be kept for several years. The reason being that the second a car is driven off the car lot it loses thousands in value. I know this doesn’t sound logical, but ask anyone who’s been in a total loss car accident within a year. This is where the Gap Insurance comes in, but we’ll get to that later. For now, I’ve compared a brand new vehicle with the same make/model one and two years older.
Resale Value of a New Car over a Three Year Period
2017 Honda Accord EX (Todays cost) $23,330.00 (I’m impressed. This is actually quite low)
2016 Honda Accord EX (Todays cost) $23,000.00 (Originally $27,380.00)
2015 Honda Accord EX (Todays cost) $18,600.00 (Originally $25,800.00/Low model up to $31,000.00)
While the 2016 retail isn’t looking so bad, take a closer look you will see the value of the Accord has come WAY down. In 2016 a new Accord started around $27 thousand. In 2017 a mere $23 thousand. The real visual is the 2015 accord. In just two years the value went down anywhere from $7 – 13 thousand. That is a huge hit. Even a conservative auto loan cannot keep up with this type of decline.
If One Must Buy New
If for some reason a person absolutely has to have a new car, then make sure it’s going to be around for a while. Even so, I recommend purchasing a used vehicle. The obvious reason is the reduced price tag. Buying used will save you thousands. When contemplating the cost of a vehicle keep in mind tax and licensing. The higher the cost of the vehicle, the higher the taxes you have to pay and unless a down payment is being made, this will be rolled into the auto loan. For a hypothetical example I’m going to use the tax rate here in Bell County. The taxes are an example of what you would pay if you were buying any of these three models today.
Variations in Taxes Based on Sale Price
2017 Honda Accord EX $23,330.00 X (6.25%) .0625 = $1,458.13
2016 Honda Accord EX $23,000.00 X (6.25%) .0625 = $1,437.50
2015 Honda Accord EX $18,600.00 X (6.25%) .0625 = $1162.50
The change in tax is not very significant because the Accord is not an expensive vehicle. Just as a hypothetical example I will show you how much might be saved if buying an expensive vehicle.
2017 $50,000.00 X (6.25%) .0625 = $3,125.00 Total cost = $53,125.00
2016 $42,000.00 X (6.25%) .0625 = $2,625.00 Total cost = $44,625.00
2015 $37,600.00 X (6.25%) .0625 = $2,350.00 Total cost = $40,950.00
Let Someone Else Take the Loss
As you can see if you are willing to buy a car that someone else took the huge loss on, you will save yourself thousands of dollars. Again by getting pre-approved for a loan in advance you have saved yourself additional money in interest fees. As an advocate for saving for a rainy day, these are the little ways Ron and I shave costs in order to have money to save. If anyone has a question on how this works please drop me a message and I would be happy to answer any questions. For now, onto the Gap Insurance.
Why is Gap Insurance Good?
If you ask me Gap Insurance is a must. Before I worked at USAA I thought this was just a way for companies to get extra money out of me. I couldn’t comprehend why I would possibly need it. Like any insurance, pay it and hope you never need it. Gap Insurance picks up where car insurance ends. Gap will not pay your deductible, but will pay anything remaining on your loan. That’s right folks, car insurance may not pay off your loan. I know this is turning into a theme with me, but that is for another day. I’ll make a note and come back to it another time.
Where Is The Negative Equity From?
Through many varying situations Americans find themselves with negative equity when trying to trade in their vehicle. This happens for many reasons. Way more than I could possibly list here. However, a couple reasons include high interest rates, specific vehicles which do not hold their value or a previous vehicle with negative equity rolled into the current loan. If you find yourself in this position, for the love of God take the insurance. There is zero percent chance that if your vehicle is wrecked the insurance will pay off your vehicle. This is for another day, but I will say this, insurance companies insure cars NOT loans.
Why a Loan Almost Always Starts Out Upside Down
Anytime tax, licensing, dealer fees and whatever else you find in your paperwork gets rolled into the loan, you are leaving the dealership in and upside down position. I would be remiss if I didn’t remind everyone, an insurance company values the vehicle. They do not care about any additional fees rolled on to the loan. Think again of the taxes on the above vehicles. If the car payment was $400 it would take three months theoretically to pay just the taxes. But that isn’t reality because of a little thing called interest. Take the Gap.
Vehicle Value ~ The Last Words Of An Insurance Company
The last point, although there are many more, insurance companies value vehicles differently than banks. The short story is, a bank will loan you as much as possible. After all they are in the business of making money. If you pay, they loan. Adversely, an insurance company is looking to pay as little as possible. To avoid a trip down the rabbit hole, we’ll come back to that later too. In short, the back of the vehicle in the above picture would be the remaining loan. A loan you will have to pay long after the car is gone. For this reason alone, even if you weren’t buying what I was saying before, this should be enough to convince you to get the Gap Insurance.
The moral of the story is this. It’s your car. Your life. You are the only person who has to be happy with the decision you make. I’m not here to judge anyone. That’s not my place. My hope is to arm all of you with some key facts to make the experience better. To assist you in saving money.
Kelly Blue Book: https://www.kbb.com/cars-for-sale/?r=698603276698215300