"If my car is totaled in an accident, will my insurance pay the amount I owe on my car loan?"
Maybe not. Most auto insurance policies will only pay you for the car’s current market value as a used car, which is almost always significantly less than what you originally paid if you bought it new. Even cars that are just a few weeks old generally depreciate significantly the minute you drive them off the lot.
Regardless of the life of your loan, the insurance payout may not be enough to pay off your loan—even if you’ve already been making payments. It’s becoming increasingly common for car owners to owe more than the car is worth, especially when buying brand new.
To estimate whether you could have this problem, go to www.kellybluebook.com and see how much one-year-old models of the car you’re considering are worth. This isn’t the exact number the insurance company will use, but can give you a general idea of how much you could get. You then need to compare this number to what you still owe your lending institution for your car.
If you do owe more than your insurance company will pay, you can solve the problem by buying gap insurance, which lenders and insurance companies offer to cover the difference between a car’s cash value when it’s totaled and the amount you still owe the lender. The price is usually minor -- averaging about $50 per year, for example, or up to $500 or $600 for the life of the loan from many lenders and dealers. Gap insurance is worth the cost only if you face a potential gap of several thousand dollars. If you are considering purchasing a brand new vehicle, it is recommended. As time passes, and your loan is reduced, so will the potential gap.
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