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What if you owe more on your car than it is worth?

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CarInsurance.com

If you owe more than your car's current market value, then after your insurance claim is settled you will owe the difference to your finance company or bank.

For example, say you have a great little used car worth about $8,000 (prior to the accident). You still owe your lender $10,000 for your car. Your claims adjuster, who has access to the information of the costs to repair your car back to pre-accident condition, tells you that it will cost $11,000.  Since the amount to fix your vehicle is more than it's worth, it will be totaled out by the insurance company.

Sometimes, companies will make this determination if the cost to repair it is as low as 70% of the value of the car. If you decide that you will take the car to "my best friends body shop" and he will do me a good deal and actually fix it for $7,000. The insurance company should love that, right?

There is one little small problem. Most states have laws on the books that are designed to keep un-roadworthy cars off the roads and highways of our fair land. They generally say if a state licensed claim agent officially totals your car then here's the scenario:

  1. The insurance company pays you the actual cash value of your vehicle at the time of the accident.
  2. The insurance company takes possession of your auto.
  3. The state issues a salvage title on your vehicle.
  4. The insurance company sells the wrecked car to a salvage company for a price they can negotiate to offset their claims expense.

Now, suddenly, due to the accident, you have NO car and you still owe your lender $2,000. Ouch! This is less than fun, especially if you really like the car that was wrecked. The unfortunately part is that you have limited choices.

  • Do without a car.
  • Keep making your payments to your lender, and find yourself another vehicle. Depending upon your financial circumstances you may have to buy an older used car to get by with until you pay off your loan and can get into a better car again.
  • Some lenders will allow you to purchase a car, put the balance on that loan, but in the end you are still paying the lender for the total loan amount, less what you received from the insurance company.

To be protected and not be stuck with these limited choices purchase gap insurance.

This situation is rare in most vehicular accidents, but it does happen on occasion. For those who have just purchased a brand new car the insurance folks have come up with something you should absolutely insist upon when obtaining insurance. Gap insurance or Loan/Lease coverage is valuable coverage to protect you when your car is totaled.

For a very thorough in-depth explanation of what gap coverage is and how it helps you to pay off your auto loan in the rare event of totaling a brand new car, take a look at this link about gap insurance. Usually gap coverage can only be purchased if a car is newer or not over a few years old, it is not generally available for older used vehicles.

A good reminder is to have comprehensive and collision or physical damage coverage -- it's required when you have a car loan. It is also referred to as full coverage, which provides protection for your car's actual cash value (minus the deductible) at the time of the accident. The vehicle owner always pays for the cash difference. 


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