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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 the repair shop for the next few days or weeks?
That’s where rental car reimbursement coverage steps in. If you have this optional coverage on your car insurance policy, you won’t need to worry.
Keep reading to learn how this coverage option works.
Before we go any further, it’s worth clarifying the potential confusion surrounding rental car coverage and rental car reimbursement coverage. The former includes damage waivers, property insurance, and liability coverage and protects you when you are driving a rental car.
You will be offered this type of insurance when you rent a car and can also get it through your current insurance policy or through your credit card, bank account or travel insurance.
As for rental car reimbursement, it is designed to cover the costs of renting a vehicle when your car is in the shop or has been stolen.
Rental car reimbursement only applies if your insurance company is paying for the repairs and those repairs are covered by your insurance policy. It is a coverage option that is typically only available to policyholders who have collision coverage or comprehensive coverage insurance.
Rental car reimbursement is designed to cover the cost of a rental car, but there are limits. Most insurance companies will only cover you for 30 days and many also set a 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 to add rental reimbursement coverage to your policy as the at-fault driver could be responsible for your rental costs. In the event of a car accident 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 a coverage limit that means they may not be liable for all the costs you pay to the rental car company. In such cases, having rental car reimbursement coverage on your policy will cover the difference and ensure you’re not out of pocket.
The cost of rental reimbursement insurance 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 and 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.
You’re involved in a minor accident and your car is taken to the body shop, now what? If you have rental coverage, you can do one of the following:
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 the rental vehicle you want, drive it off the lot, and wait for your car to be fixed and your expenses to be covered.
The second option, and the best option, is to go through your insurance company. They will contact the rental company 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 additional rental car coverage like damage waivers. But as noted already, your auto policy may already provide you with the cover that you need.
On average, you will use rental car coverage just once in a 10-year period, and you may only need it for a few days at a time. To determine whether this additional coverage 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 this additional coverage option when those are the prices quoted.
From car rental coverage and rental car reimbursement to 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 your auto insurance policy 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 about rental car reimbursement carefully and reject it if you don’t need it, even if it is only $10 or $20 extra a month.Â
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A Guide to Rental Reimbursement Coverage is a post from Pocket Your Dollars.
Source: pocketyourdollars.com
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.
Related Article: The Best Cities for Electric Cars
Final Word
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.
Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First youâll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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