You owe more on your auto loan than your vehicle is worth.
How can that be? When you purchase a new vehicle, the car value depreciates as soon as you leave the dealership. This means that depending on how much you financed you may owe more on your loan than the car is worth. There are 2 ways to protect yourself if your car is totaled and you owe more than it is worth. You can purchase GAP insurance from the dealership as part of your financing agreement when you purchase your vehicle. Typically this adds $800+ to your auto loan and you will pay interest on this amount for the life of your loan. Or, you can add auto loan coverage to your auto policy when the vehicle is originally added. Adding this coverage can be as little as $20 per year and can be removed from your policy as soon as you’re not upside down with your vehicle value vs loan value.
Your vehicle is damaged beyond repair
Your vehicle is insured for “actual cash value” this is the amount that your vehicle can be purchased for at the time of the loss. This is not the amount that you owe on your loan. If you don’t have auto loan coverage, you can end up having a loan balance to pay even after your vehicle has been totaled. With auto loan coverage, the insurance carrier will pay the balance of your loan even if that is more than the actual cash value of the vehicle.
Applying for an auto loan? Call your insurance agent.
The first thing you should do after applying for an auto loan is contact your insurance agent. Auto Loan Coverage or GAP insurance can be added to personal auto policies and is more cost effective than the coverage provided by the auto finance companies.
- Casey Shipley