When a Totaled Vehicle Leaves You Underwater: How to Protect Yourself Financially
At VanScoter Insurance Agency, we recently saw a dramatic accident where an SUV went off the road and snapped a tree in half. Thankfully, no one was seriously injured. But the vehicle itself? Completely totaled.
This kind of situation is all too common—and what we’re noticing more and more in our office is how many drivers find themselves “underwater” on their auto loans after a total loss. That means the insurance company’s payout for the totaled vehicle is less than the amount still owed on the loan. When that happens, the vehicle owner is left responsible for paying the remaining loan balance out of pocket, even though the car is gone.
Why Does This Happen?
Cars depreciate quickly—often losing value faster than the loan is paid down, especially if you put little money down or finance over a long term. So, even if you keep making payments, your vehicle’s actual cash value (what the insurance company uses to calculate a payout) might be less than what you still owe.
How to Avoid Being Underwater on Your Car Loan
Here are some practical tips we recommend to protect yourself:
- Put at least 25% down when purchasing a new vehicle. A higher down payment helps ensure you have immediate equity.
- Finance your vehicle for no more than 3 to 5 years. Longer loans may lower your monthly payment but increase the risk of owing more than the car’s worth.
- Consider GAP coverage if you can’t meet those two recommendations. Guaranteed Asset Protection (GAP) insurance covers the difference if your vehicle is totaled and you owe more than the insurance payout. It’s often available through your financing company or your insurance agent.
Why GAP Coverage Matters
If your car is totaled and you owe more than its market value, GAP coverage kicks in to pay off the remaining loan balance. This means you won’t be left with a financial gap after an accident, helping you get back on the road without the burden of a loan on a car you no longer have.
Final Thoughts
Buying a car is exciting, but it’s important to plan ahead to avoid financial surprises in the event of an accident. Whether you’re buying your first car or your next one, taking steps to protect your investment and your finances is key.
If you want to learn more about GAP coverage or other ways to protect yourself on the road, give us a call at VanScoter Insurance Agency. We’re here to help you drive with confidence.
