To Protect or Not Protect: That is the question…

People buy insurance for a host of things. You insure your home against loss to fire, your auto against accidents or theft. You HOPE you don’t need it, but you buy it to protect yourself against a loss. But what about a car accident that is so serious that your insurance determines a vehicle is a total loss? If you still owe on an auto loan, you may owe more on it than what it’s worth. Sources estimated in 2020, Americans owed more than 1.3 trillion dollars in balances on their car loans. In general, automobiles are depreciating assets.

Consider this: You bought a car 12 months ago for $25K and financed all the taxes and fees in with your loan (a no money down purchase). On day 1, you would have owed around $27K. U.S. News & World Report reports the average used car loan rate for individuals with average credit (600-699 FICO Score) in September of 2021, was 14.88%. Using a more conservative APR of 9.99%, after a year of payments, the balance would be slightly over $22K. Depending on how many miles you have driven the car since it was purchased, there is a good possibility you could end up owing more to pay it off than your insurance company might agree to pay. For example, the settlement is $20K. Who owes the 2K difference to the bank to pay off your loan? YOU DO. OR - , GAP insurance. As long as the loan is current, GAP insurance pays the shortfall so that you don’t have pay the balance yourself. GAP insurance isn’t appropriate for all car loans. You should speak with the finance and insurance manager at the dealership to help determine whether or not the coverage is advisable.