News

Gap Insurance

Posted on: September 23, 2014
Tags: Insurance matters

With today's longer car loans, many car owners are setting themselves up for financial trouble in the event of an accident.

They suddenly find themselves with no car, and no money.

Car Totaled, No Money For Replacement

Andy Brothers is in a bind. His 2008 Ford Fusion is a total loss.

Falling concrete smashed in the roof and windshield during Sunday's Cincinnati Bengals game , when he was parked under a Brent Spence Bridge on-ramp.

"It's gone," he said about his car. "And I have nothing really to show for it other than another 5 year loan payment."

Neither the city or the state will take responsibility, so he has to file an insurance claim. Trouble is, the car is not paid off.

"I still owe $5,500," he said.

His insurer will pay him only $7,000, not the $13,000 he paid for the car a couple of years ago. So he has barely any down payment for a new car.

"Everything would have been good if I didn't have to pay off the rest of the loan, but that's not how the real world works."

Many People Upside Down in Loan

At least he doesn't owe the bank money. Some drivers do, and have it even worse.

  • For instance, say you bought a car for $20,000.
  • But now the insurance company values it at just $15,000.
  • If you wreck it, you still have to pay the lender $5,000.

Cincinnati Insurance Board Vice President Ron Eveleigh said "the insurance company is going to pay you the actual cash value of the car.  If the loan value is greater of the actual cash value of the car you as an individual are going to have to pay the difference."

Eveleigh says that's why "Gap Insurance" is so important.

What Gap Insurance Does

Gap Insurance covers any gap between what you owe and what insurance pays. It can give you a check for several thousand dollars, enough to get you set for a new car.

The Federal Trade Commission recommends it if your down payment is low, or you're leasing the car. You can buy it from the dealer, or your auto insurer, which may offer a lower rate.

In Brothers' case, it would have at least paid the $500 deductible, taking a bit of the sting out of his mishap.

As always, don't waste your money.

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