Dispelling Auto Insurance Myths - Loan Payoff for Totaled Vehicle
Posted on Mon, Jan 31, 2011
You’ve just signed the paperwork to purchase a new car. So what happens if your new ride is totaled in an accident shortly after you drive it off the lot? Insurance will take care of the whole thing, right? Maybe, maybe not.
When your car is totaled, your insurer will pay you the actual value of your car (before the accident), minus your deductible. You are still responsible to your lending institution for any amount outstanding on the loan or lease. The only way to cover the difference between the car’s actual value and the amount you owe on the loan is to purchase gap insurance.
Gap insurance covers the difference between what a car is worth and what you owe on it. It can provide valuable protection during the early years of your car's life if you have a loan or a lease.
Here’s how gap insurance works
You purchase a new car for $20,000. You put $500 down and your payments are $350 per month. Six months after buying your car, it’s involved in an accident and totaled. Even though your vehicle is only a few months old, your insurance company determines that your car is now worth only $16,500. They will pay you that amount (less your collision deductible if the accident is your fault). You've made six monthly payments plus your down payment, for a total of $2,600; you still owe $17,400 to the finance company. In a case like this, gap insurance would pay the $900 difference between what collision insurance covers ($16,500) and what you owe on the car ($17,400). If you did not have gap insurance, the extra $900 would come out of your pocket.
Who should buy gap insurance?
You’re a good candidate for gap insurance if:
• You lease a vehicle
• You made a low down payment (generally, less than 20%)
• Bought a car that depreciates rapidly
• Have a high interest rate
• Rolled over other costs, such as money owed on a trade-in, into your new-car payments
Keep in mind, gap coverage can be added to an auto policy through an insurance agent for typically less money than the cost of buying the coverage from a car dealership.