How can you lose $133 a day? Here’s a hint: It’s sitting in your driveway.
At least, that’s true of the first month after the purchase of a new vehicle. We covered this a while back with information from Carfax. That’s just how hard depreciation hits on a brand-new $40,000 vehicle once you drive it off the lot.
Depreciation is the rate at which an object’s value is lost over time. When we checked in with Gary, this was a lesson learned: when an auto collision results in a total loss, insurers only pay an amount equal to the current value of the vehicle. That means you could be getting back substantially less.
How much less?
Here is a quote:
“…most car insurance customers are clueless as to the
methodology used by insurance companies to value cars.”
Gary had to track down Kelley Blue Book values for his written-off 2012 Ford Fusion. He needed to assess the values of the make and model, with similar mileage. He rounded up the largest numbers he could bring to the table and he was still paid only 80% of his findings.
In the auto insurance industry exists an element of economic asymmetry, where what you see isn’t always what you get when it comes to the price tag, or in this case, indemnification. Insurance companies use their own proprietary software to determine a car’s actual value. It tows a line between client satisfaction and cost savings for them.
Gary was lucky in that he had paid off his car in full. Others are less fortunate; it’s possible for an insured client to have a loan balance to pay back because the car depreciated faster than the rate the loan was being paid down. Imagine that: You still owe $12,000 on a vehicle that’s been written off, and your insurance company cuts you a cheque for $9,000. Now, you’re on the hook to pay the loan off, and you still need to get around.
This chart shows the immediate effects of depreciation (that $133 per month mentioned earlier). You can also note how long it takes for a vehicle’s depreciation to outlast the value of a fixed-term loan. You can find out more here.
Driving your car shouldn’t feel like digging a hole.
First, GAP insurance covers this exact situation in the event of a total loss calculation.
While the total loss benefit is covered by your standard insurer, Optiom will indemnify the remaining balance.
You read that right. Whatever number falls between your initial payout and the value of your vehicle in the current make and model year comes back to assist with your next vehicle purchase.
If you’re involved in a total loss collision with your 2016 model and the 2022 version is on a showroom floor somewhere, it becomes the benchmark value for your vehicle. We chatted extensively about it here.
It’s important to have vehicle replacement insurance, especially as technology continues to evolve. In 2019, The Conversation put out an article stating that cars would change more over the next decade than they have in the previous fifty years. Fifty years may seem staggering, but it makes sense, based on that first link in this paragraph. It’s not to a point of making vehicles obsolete, but it certainly doesn’t do much for the book value.
When you get what you want your vehicle to be worth after a collision, you get what it should be worth, instead of substantially less. If you aren’t driving with Optiom, your financial position is only partially protected.