Getting a new car is usually fun and exciting.  But having a total loss on a new car causes a double-whammy: the extreme disappointment of losing a new car, plus the shocking realization that the loan or lease balance can be greater than the amount paid by the insurance company for the total loss of the car.

Owing more than the car is worth is often referred to as being “upside down” in the loan or leas. 

For insureds, still owing money after a car has been totaled is extremely frustrating.  Fortunately, there are endorsements and insurance available to solve the problem.
The latest study from Kelley Blue Book Marketing Research points out that the value of used cars is plummeting, in part due to zero-percent financing and a glut of used vehicles on the market.

“Consumers who purchased vehicles with little or no money down and for a six or seven year term, will find they owe more than the car is worth when seeking out their next new vehicle," said Jack R. Nerad, editorial director of Kelley Blue Book's kbb.com.

For example, a Ford Taurus with a sticker price of $23,305 just two years ago commands a trade in value of only $8,350, which is a whopping 64% depreciation. 
A Chevrolet Suburban with a sticker price of $43,440 yields a trade in value of $24,125, or 45% depreciation after only two years.

Other examples of depreciation or cars that are currently two-years-old include:

            Nissan Maxima SL (33.7%)
Mercedes ML 500 (41.2%)
Infiniti Q45    (48.3%)           
            Dodge Durango SLT 2WD (51.8%)
           
As if the decreased value weren’t enough, the real problem lies in the fact that the loan amount on many cars decreases only slightly in the first two years. 

For example, suppose the buyer of the Taurus above, obtained a five year loan in the amount of $15,000 at a rate of 8% interest. 

After two years the principal balance would be $9,705. With a 100% financing situation (not uncommon today) the Taurus would have a remaining loan amount due of $15,078 after two years.
 
In the first two-and-a half-years of the loan it’s entirely possible that the vehicle owner would owe more on the loan than they would receive from the insurance company if the car was a total loss following an accident.

The number of insureds who face a gap in their auto loan/lease and insurance is significant, and growing.
 
Fortunately, there is a relatively simple solution.

The personal auto policy has an endorsement available to provide a remedy for this coverage dilemma.  The endorsement is called “Gap” coverage because it “fills the gap” between the amounts owed on a loan and the actual cash value settlement paid by the insurance company for a total loss vehicle.

The cost to add the endorsement is small, and in simple terms adding the “Gap Endorsement” provides payment for the difference in what the client owes the bank, and what the insurance company pays as actual cash value of the auto. It means you won’t lose your car and have to pay money to your lender at the same time – the “double whammy” effect.

The consumer has another option, in that they can purchase “Gap Coverage” when they purchase their new vehicle.  By adding “Gap Coverage’ to your personal auto policy, the consumer will see a significant savings over the dealership policy.

Clearly, members who purchased or leased cars in the last two years could face a very nasty surprise should they ever face a total loss.  Anyone buying a new car needs be aware of the “gap” in their vehicle’s worth and the loan on it.

If you find yourself in an “upside down” auto loan, or want to avoid being in this position, contact your insurance agency or AAA Carolinas at 1-800-974-1222.  Let a professional fill in the “Gap” for you.