You’re involved in an accident, your car is wrecked, and your insurer has stepped in to cover the damages. All is well, and you only have the deductible to worry about, but what happens before the car is fixed? How do you continue to get to work every day and take the kids to school when your car is in theÂ repair shopÂ for the next few days or weeks?
That’s whereÂ rental carÂ reimbursementÂ coverageÂ steps in. If you have thisÂ optional coverageÂ on yourÂ carÂ insuranceÂ policy, you won’t need to worry.
Keep reading to learn how this coverage option works.
Rental CarÂ ReimbursementÂ vsÂ RentalÂ CarÂ Insurance
Before we go any further, it’s worth clarifying the potential confusion surroundingÂ rental carÂ coverageÂ andÂ rental carÂ reimbursementÂ coverage. The former includes damage waivers, property insurance, and liability coverage and protects you when you are driving aÂ rental car.
You will be offered this type of insurance when you rent a car and can also get it through your currentÂ insurance policyÂ or through yourÂ credit card, bank account or travel insurance.
As forÂ rental carÂ reimbursement, it is designed to cover the costs of renting a vehicle when your car is in the shop or has been stolen.
Rental carÂ reimbursementÂ only applies if yourÂ insurance companyÂ is paying for the repairs and those repairs are covered by yourÂ insurance policy. It is a coverage option that is typically only available to policyholders who haveÂ collision coverageÂ or comprehensive coverage insurance.
What DoesÂ Rental CarÂ ReimbursementÂ Cover?
Rental carÂ reimbursementÂ is designed to cover theÂ cost of aÂ rental car, but there are limits. MostÂ insurance companiesÂ will only cover you for 30 days and many also set aÂ daily limit, often between $50 and $100. This means that you can’t claim for costs above this or for a rental period that extends beyond it.
In some states and in some situations, you may not even need toÂ addÂ rental reimbursement coverageÂ to your policy as theÂ at-fault driverÂ could be responsible for yourÂ rental costs. In the event of aÂ car accidentÂ caused by a fully-insured driver, their liability insurance may cover you for transportation costs, while also paying for the damage done to you and your vehicle.
However, there is aÂ coverage limitÂ that means they may not be liable for all the costs you pay to theÂ rental carÂ company. In such cases, havingÂ rental carÂ reimbursementÂ coverageÂ on your policy will cover the difference and ensure you’re not out of pocket.
How Much Does it Cost?
The cost ofÂ rental reimbursement insuranceÂ differs from state to state and provider to provider. Your costs will also be higher if you are deemed to be a high-risk driver and have a history of at-fault accidents andÂ insurance claims. Generally, however, you can expect to pay anywhere from $3 or $4 a month extra to $15 or $20 a month extra.
It’s not a huge amount because the cover provided is very limited. For instance, at $50 a day over 30 days, the insurer’s liability is just $1,500, which is a fraction of the amount they can expect to lose with other coverage options.
How Does the Process Work?
You’re involved in a minor accident and your car is taken to theÂ body shop, now what? If you haveÂ rental coverage, you can do one of the following:
1. Pay for it Yourself
When you pay for the vehicle yourself, you have more choice about what car you rent and from where you rent it, and you can also get it as soon as you need it. If you choose this option, just make sure you keep a record of all the costs so you can report these to the insurer and get your money back.
By choosing this method, you have more control and providing you have cover, you shouldn’t encounter any issues when seeking reimbursement. Get theÂ rental vehicleÂ you want, drive it off the lot, and wait for your car to be fixed and your expenses to be covered.
2. Let YourÂ Insurance CompanyÂ Do It
The second option, and the best option, is to go through yourÂ insurance company. They will contact theÂ rental companyÂ on your behalf and deal with all of the red tape, ensuring you only get a car that you are fully covered for and providing you with all the necessary details at the same time.
By going through your insurer, you can avoid the hassle and they may even help you to get a better deal.Â
It’s worth noting, however, that your insurer will not pay for additionalÂ rental carÂ coverageÂ like damage waivers. But as noted already, yourÂ auto policyÂ may already provide you with the cover that you need.
Should You Get AdditionalÂ CarÂ RentalÂ Reimbursement Coverage?
On average, you will useÂ rental carÂ coverageÂ just once in a 10-year period, and you may only need it for a few days at a time. To determine whether thisÂ additional coverageÂ option is right for you, simply calculate how much it will cost you on a monthly basis and then compare this to how much it is likely to offer you.
For instance, let’s assume that you are charged $10 a month for this additional option. This means you will pay $120 a year or $1,200 over ten years. Assuming you’re being offered a maximum of $50 per day for 30 days, this means the benefits are capped at $1,500.
If you’re paying $15 a month instead, that’s $180 a year, $1,800 a decade, and more than you will get back. And, in both cases, we’re assuming that you rent a car for the full 30 days at the maximum allowed price, which is somewhat rare. As a result, you can probably overlook thisÂ additional coverageÂ option when those are the prices quoted.
Bottom Line: ChoosingÂ Insurance Coverage
FromÂ carÂ rentalÂ coverageÂ andÂ rental carÂ reimbursementÂ toÂ roadside assistance, new car replacement and more, there is no shortage of options for the average driver.Â
But as tempting as it is to add all of these options to yourÂ autoÂ insuranceÂ policyÂ in the knowledge that you’ll be fully covered, the costs can spiral out of control very quickly. You could find yourself spending an excessive amount of money unnecessarily, and at a time when everyone is watching their budgets, that’s never a good thing.
Think aboutÂ rental carÂ reimbursementÂ carefully and reject it if you don’t need it, even if it is only $10 or $20 extra a month.Â
A Guide to Rental Reimbursement Coverage is a post from Pocket Your Dollars.
These days, it can take a long time to pay off a car loan. On average, car loans come with terms lasting for more than five years. Paying down a car loan isnât that different from paying down a mortgage. In both cases, a large percentage of your initial payments go toward paying interest. If you donât understand why, you might need a crash course on a concept called amortization.
Find out now: How much house can I afford?
Car Loan Amortization: The Basics
Amortization is just a fancy way of saying that youâre in the process of paying back the money you borrowed from your lender. In order to do that, youâre required to make a payment every month by a certain due date. With each payment, your money is split between paying off interest and paying off your principal balance (or the amount that your lender agreed to lend you).
What youâll soon discover is that your car payments â at least in the beginning â cover quite a bit of interest. Thatâs how amortization works. Over time, your lender will use a greater share of your car payments to reduce your principal loan balance (and a smaller percentage to pay for interest) until youâve completely paid off the vehicle you purchased.
Not all loans amortize. For example, applying for a credit card is akin to applying for a loan. While your credit card statement will include a minimum payment amount, thereâs no date set in advance for when that credit card debt has to be paid off.
With amortizing loans â like car loans and home loans â youâre expected to make payments on a regular basis according to something called an amortization schedule. Your lender determines in advance when your loan must be paid off, whether thatâs in five years or 30 years.
The Interest on Your Car Loan
Now letâs talk about interest. Youâre not going to be able to borrow money to finance a car purchase without paying a fee (interest). But thereâs a key difference between simple interest and compound interest.
When it comes to taking out a loan, simple interest is the amount of money thatâs charged on top of your principal. Compound interest, however, accounts for the fee that accrues on top of your principal balance and on any unpaid interest.
Related Article: How to Make Your First Car Purchase Happen
As of April 2016, 60-month new car loans have rates that are just above 3%, on average. Rates for used cars with 36-month terms are closer to 4%.
The majority of car loans have simple interest rates. As a borrower, thatâs good news. If your interest doesnât compound, you wonât have to turn as much money over to your lender. And the sooner you pay off your car loan, the less interest youâll pay overall. You can also speed up the process of eliminating your debt by making extra car payments (if thatâs affordable) and refinancing to a shorter loan term.
Car Loan Amortization Schedules
An amortization schedule is a table that specifies just how much of each loan payment will cover the interest owed and how much will cover the principal balance. If you agreed to pay back the money you borrowed to buy a car in five years, your auto loan amortization schedule will include all 60 payments that youâll need to make. Beside each payment, youâll likely see the total amount of paid interest and whatâs left of your car loanâs principal balance.
While the ratio of whatâs applied towards interest versus the principal will change as your final payment deadline draws nearer, your car payments will probably stay the same from month to month. To view your amortization schedule, you can use an online calculator thatâll do the math for you. But if youâre feeling ambitious, you can easily make an auto loan amortization schedule by creating an Excel spreadsheet.
To determine the percentage of your initial car payment thatâll pay for your interest, just multiply the principal balance by the periodic interest rate (your annual interest rate divided by 12). Then youâll calculate whatâs going toward the principal by subtracting the interest amount from the total payment amount.
For example, if you have a $25,000 five-year car loan with an annual interest rate of 3%, your first payment might be $449. Out of that payment, youâll pay $62.50 in interest and reduce your principal balance by $386.50 ($449 â $62.50). Now you only have a remaining balance of $24,613.50 to pay off, and you can continue your calculations until you get to the point where you donât owe your lender anything.
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Auto loan amortization isnât nearly as complicated as it might sound. It requires car owners to make regular payments until their loans are paid off. Since lenders arenât required to hand out auto amortization schedules, it might be a good idea to ask for one or use a calculator before taking out a loan. That way, youâll know how your lender will break down your payments.
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