When a car loan is worth more than the car, what gap insurance pays, where to buy it and when to cancel it.
If your car is totaled or stolen, insurance pays its actual cash value — what it was worth just before the loss. Your loan balance doesn’t care what the car was worth. When you owe more than the car’s value, the difference is yours to pay. Gap insurance covers it.
Buyers who put little or nothing down, take loans of 60 months or longer, roll taxes, fees, warranties or an old loan into the new one, or buy a model that loses value quickly. New cars commonly lose about a fifth of their value in the first year while the loan pays down slowly.
A $35,000 car with $3,000 down and $2,500 of fees in the loan starts as a $34,500 loan. At 7% for 72 months, after one year you owe about $29,705 while the car is worth about $28,000 — a $1,705 gap. On these numbers you owe more than the car is worth until month 29.
Auto insurers often sell gap coverage as an add-on for less than dealers charge, and leases frequently include it. Once your loan balance falls below the car’s value, gap insurance no longer does anything — cancel it and ask about a refund of any prepaid portion.