Will My Car Loan be Paid Off If I Total My Vehicle?
Imagine you just spent $30k on a brand-new, state-of-the-art , SUV. The vehicle has less than 1000 miles on it, and it still has that "new car" smell. And of course, your kids are begging to drive it. Finally, you give in, and your teenager wraps it around a telephone pole. Luckily he was wearing his seat-belt so your kid is fine, but your SUV is completely totaled. No more envious looks from the neighbors. No more shiny new SUV sitting in your driveway. But, you've got auto insurance so your going to be covered for the loss, right?
Wrong. The average auto insurance policy will not pay off the balance of your auto loan if your vehicle is totaled in an accident. Some auto insurance policies will pay the actual cash value of your vehicle, less your deductible. However, you will still be responsible for paying any difference owed to the lender. For example, if you purchased a $20k vehicle, and owe $10k, but the vehicle is only worth $5k, then you will be responsible for the remaining $5k to the lender. The cash value of the vehicle is determined by the specific company that you have an auto insurance policy through, but are usually based on the Kelley Blue Book value.
Additionally, you must be carrying comprehensive or full-coverage insurance to even be considered for compensation for a totaled vehicle. Drivers with only a liability coverage auto insurance policy will not recoup any costs for a totaled vehicle. Liability insurance only covers damage done to the other party's vehicle during an accident.
Is the vehicle totaled?
Even if a vehicle is wrapped around a telephone pole and you can't drive it, that doesn't meant it is necessarily "totaled." While YOU may think it is totaled, that determination will be made by the insurance company. In most cases, if repair costs are more than the cars value, then it is considered totaled. But, check your auto insurance policy for specifics.
There's hope with GAP insurance
GAP is an acronym for Guaranteed Auto Protection Coverage. GAP insurance is the only way to recoup the difference between the amount you owe on the vehicle, and its cash value. GAP insurance is relatively cheap, and is a smart investment for individuals purchasing or leasing a new vehicle. GAP insurance can be purchased through an auto insurance company, and sometimes even a dealership — though their coverage is temporary. Even if you have full or comprehensive coverage, it does not mean you have GAP insurance. Contact your auto insurance provider prior to purchasing or leasing a new vehicle, and inquire about GAP insurance. Otherwise, you can search for GAP insurance online.