How to Close the Gap When Your Car Is Worth Less Than You Owe

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When your car is worth less then you owe you may have a “gap” in your insurance coverage that could cost you thousands of dollars if you are in an accident. How does this gap occur? How long does it last? How can you protect yourself? Let’s take a look at each of these questions.

How does a “Gap” in your auto insurance occur?

When you purchase a new car you are probably aware that the value of the vehicle decreases the moment you drive it off the lot. If you took out a loan to buy the vehicle you may immediately owe more to the bank then the car is worth. As you continue to drive the car the difference between its actual value and what you owe can continue to increase.

In most cases the insurance you have on your car only covers the actual value of your vehicle. If your car is totaled the insurance company will pay only Actual Cash Value meaning depreciation. If the amount they give you is less than the amount you owe on the car, you are responsible for paying the remaining amount.

There are many factors that cause this “gap” in coverage. These days, the big discounts being offered for new car purchases are depressing the value of slightly used cars. That means that new car buyers who finance their new cars are even more  ‘upside down’ than ever before.  Lately, the average gap between what a car is worth and what is owed on it is $2,200.

New car buyers also may look for longer terms and lower payments on a vehicle loan.  The longer it takes to pay for the car, the longer it takes to reach the point at which you owe less than the car’s depreciating value. Many people recall when three-year loans were standard, four-year unusual and five-year unheard of. These days, five-year loans are common.


Bill just purchased a new car. The car cost $24,000. Bill drives the car off the lot and it goes from a new car to a used car. After a few months of driving the car, the actual cash value of the vehicle is now only $20,000. Bill gets into an accident and his car is deemed a total loss. His insurance company sends him a check for the $20,000 that the car is worth and he is stuck paying the additional $2,200 he still owes to the bank out of his own pocket.

How long does the “Gap Last”

As time goes on the value of a vehicle will decrease. Payments made will also reduce the remaining balance of the vehicle loan. At some point usually 2 or 3 years after the purchase of a new car, the cars value will equal what is owed on the loan. At that point there is no longer a “gap” in insurance coverage and the driver is protected from losing money in the event of a total loss.

How you can protect yourself:

Gap insurance is a simple way to protect yourself from losing money from an accident. This low cost insurance can make a big difference in the amount you receive if an accident renders your vehicle a total loss. 

Car dealers are becoming more aware of the problems these widening gaps can cause and now offer gap insurance, usually costing between $500 and $700. In some cases, the leasing company may already include this but best to check with your insurance agent as to whether you should purchase this protection or not.  Most insurance companies may call the coverage lease/loan security. Otherwise its usually referred to as gap coverage.  Please note you may purchase gap coverage for a leased vehicle as well as a vehicle that is financed. Your agent can help you find the right policy and also see if your existing insurer offers incentives for getting all your coverage in one place.

Generally speaking the gap coverage or lease/loan  protection will pay the unpaid amount due on the lease or loan, less any overdue payments, penalties , carry over balances and cost for extended warranties or other added items. The appropriate policy will provide low cost coverage that will give you peace of mind knowing your new car is protected. Client Advocates at Miller’s Insurance can walk you through all of your options to find the best coverage to meet your needs. 



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