Car Buying Myth #3

Myth #3: Insurance pays for destroyed or stolen cars, regardless of loan balance

Technically, this is true, but not in the way that most people interpret it.

If your car is stolen or totally destroyed in an accident, fire, or flood, the insurance company pays the current market value, which is sometimes called replacement value. This would be fine if the car was paid for.

Unfortunately, in these days of long-term loans, low down payments, deferred payments, and roll-over balances, it is very common for automotive consumers to be "upside down" for much, if not most, of their loan period.

This means that at any given time, the amount remaining on the loan exceeds the actual value of the vehicle. In this case, if the vehicle is stolen or destroyed, the insurance payment would only cover part of the loan payoff, leaving a "gap" that the consumer would be held responsible for paying in cash. In many situations, this could amount to thousands of dollars. The thing that is frequently misunderstood here is that the insurance company does not pay the amount owed, it pays for the value of the vehicle.

This is also a common situation in leasing. However, most auto lease companies cover both themselves and the consumer lessee by providing free "gap insurance" or a "gap wavier" that pays any remaining amount after insurance has paid.