There are two things to consider when it comes to the value of a car that is financed – the blue book value of the car itself and the actual amount you owe on the loan. Your vehicle depreciates in value the second you drive off of your dealer’s lot. The older your car gets, the faster the car depreciates in value, and the more complicated this question becomes.
What’s the value of my car?
The value of your car is determined by something known as the Kelley Blue Book. This is a standard tool used by most insurance companies, private sellers, and dealerships. It lists the year, make and model of a car and it allows the value to be calculated based not only on the age but on the condition of the car. The older a car, the less it is worth.
The problem, in terms of a car that is financed, is that drivers often become “upside down” on their loans. The car depreciates in value and ultimately becomes worth less than the amount still owed on the loan. You could very easily, for example, have a car with a Kelly Blue Book value of $15,000 while still owing $18,000 to your finance company.
So what happens if the car is totaled?
You end up in a car accident and your car is totaled – no longer drivable or fixable. Your insurance company is only obligated to pay you the value of your car. In the above example, your insurance company will pay your finance company the $15,000 that the car is actually worth. That leaves a balance of $3,000 that you still owe your finance company. You are responsible for paying this amount.
There is a solution, though. When you purchase your car your dealer will ask you if you’d like to purchase a product known as “gap insurance.” The premium is usually a few hundred dollars and can be rolled into your car payments. Gap insurance lasts the life of your loan and will pay the difference between the value of your car and the balance left on your loan. In the above example your auto insurance company would pay the initial $15,000 value of the car and the gap insurance company would pay the remaining $3,000 you owe the loan company. Your out of pocket costs… nothing.
Your personal financial situation will dictate your decision to purchase gap insurance. But, it is important to think about adding this extra amount of insurance. For just a few hundred dollars, it’s worth considering – especially if you don’t usually have a lot of extra cash in savings for this type of unexpected expense.