Totaled: Upside-down car loans and when Gap Insurance could be a good idea


Boston Public Library Collection - Leslie Jones

Boston Public Library Collection – Leslie Jones

We recently came upon an excellent vintage photo collection of Boston-area car wrecks from the 1930s. Part of a larger Boston Library Collection, the photos were taken by Leslie Jones, a well-known news photographer of the era. Despite the big solid appearance of the cars, the damage is impressive. There weren’t very many safety features built in to these old behemoths. Many of the wrecks look like the vehicles sustained a total loss.

Generally, a car is “totaled” when it will cost more to repair the car than the car’s actual cash value (ACV) is worth. Of course, it’s a little more complicated than that, as Gary Wickert explains in Claims Journal: When is A Vehicle Considered a Total Loss?

The criteria for deciding when a car is a total loss and when it can be repaired vary from insurance company to insurance company and might even be dictated and controlled by state statute or regulation. Further complicating the issue is the fact that insurance companies do not all use the same sources for determining the value of a vehicle. The threshold used by your insurance company to make this determination can be discovered by calling your insurance agent. Insurance professionals, on the other hand, have to be familiar with these rules, criteria, and thresholds in all 50 states.

If your car is totaled, you’ll be paid only for the ACV of the car after any deductibles have been satisfied. If you own the car outright, the check will be sent to you. But if your car is financed, the payment will go to the bank or finance company.

What if you still owe more on the car than the car is worth?

With today’s low down payments and long-term financing arrangements, it can be easy to find yourself under water in a situation where you owe more than a vehicle is worth – in the auto industry this is called being upside-down on a loan – and today, “… it applies to roughly half of all new-car buyers.” Unless you have Guaranteed Replacement Cost coverage or Guaranteed Auto Protection (Gap insurance), you could be out of luck.

Would you still have to pay what you owe on the wrecked car? Absolutely: the folks at NOLO explain: My Car Was Totaled But I Still Owe Money on It

But what happens if your loan amount is larger than the amount of the insurance company’s check? The very short answer to this question is: you are still legally obligated to make your monthly loan payments to the bank or financial lender until the loan is paid off. The fact that your car was a total loss does not change your loan repayment terms. Your legal obligation to repay the loan continues. The bank or lender still has the right to full repayment of the loan, even though you may no longer have your car.

Nobody plans to be in a car crash, but when buying a new car, Gap Insurance might be a worthwhile option if you’ll be putting little or nothing down for a deposit or if you plan on financing the car over an extended period of time.  Here’s what the Insurance Information Institute says about times when Gap Insurance might be a worthwhile investment. If you:

  • Made less than a 20 percent down payment.
  • Financed for 60 months or longer.
  • Leased the vehicle.
  • Purchased a vehicle that depreciates faster than the average.
  • Rolled over negative equity from an old car loan into the new loan.

III says that car dealers often offer a type of gap coverage, but that it might be cheaper to purchase through your  regular insurance company.  Why not check with your local insurance agent to know your coverage options before buying  a new car?