The Danger of Zero Down, Zero Interest Auto Loans

Autos & TrucksInsurance

  • Author Sam Streubel
  • Published May 24, 2010
  • Word count 485

Zero down, zero interest auto loans are the ultimate temptation. Especially if you’ve just gotten a new job or recently returned to work. Everyone deserves to be rewarded, especially after the events of the last two years. And nothing says "you done good" better than a shiny new car.

But since you put 0 down and have no equity in the car, the last thing you want to do is jeopardize the value of your new investment by not protecting it against the ravages of depreciation.

Just about any auto will lose 30% of its value after the first year, even if you’ve racked up only 10,000 miles. And in the case of a 2009 Chevy Malibu, by the end of the second year it will have lost almost 60% of its value.

In the matter of only two short years the value of this popular car will have plummeted $13,000 from its original valuation of $22,500 to only $9452.

You could almost stomach the steep drop in value if you knew the loan balance was declining just as swiftly. But it isn’t – not even at 0 % interest.

After 2 years of payments on a 5 year, 0 down, 0% interest loan for $22,500, the payoff amount would still be $13,500 – or approximately $4,000 more than the car is worth.

At this rate it would take 45 payments before the loan balance and the value of the vehicle equaled each other. In the meantime you’re on the hook for the difference between the actual cash value of the car and the loan balance.

In other words you would owe anywhere from $6,000 to $8,500 over and above what the insurance company paid if a catastrophic event destroyed your car within the first 3 years of ownership.

There are a couple of ways you could protect yourself from potential financial disaster. One would be to leave your car in the garage for the first 31/2 years. It wouldn’t be fun, but it would be effective. Unless of course a storm ripped up a tree and dropped it on your garage.

Or, you could spend a little more than $100 over the course of a few years to get someone else to pay off your loan in the event your vehicle was totaled. This is how the major insurance carriers calculate gap insurance premiums:

According to Bill Pearse, vice president of auto product strategy and design for Travelers Insurance, "Travelers calculates gap insurance premiums at roughly 5 percent to 6 percent of the premium for collision and comprehensive insurance you have on the car. On a $1,400 annual premium, with $420 to $560 of that typically for collision and comprehensive, gap insurance would cost $20 to $30. And the cost goes down along with the cost of collision and comprehensive as the vehicle ages." That’s $20 to $30 a year, not per month.

No matter what you want to call it - replacement value insurance, loan/loss payoff coverage, or gap insurance – they all mean the same thing – protection for your investment.

Learn how to protect your investment for pennies a day at auto gap insurance online.

Article source: https://articlebiz.com
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