(Toledo News Now) - If you're involved in an accident, you may assume your insurance will cover the repair bill. And it will, but if you still owe a lot of money on your car loan, you could be in for a big surprise.
When you buy a car, the salesman may offer you GAP (Guaranteed Auto Protection) Insurance. It might sound like another worthless add-on to make the dealership money, but before you say no, you should know what it is and what can happen if you don't have it:
Falling concrete smashed in the roof and windshield of Andy Brothers' 2008 Ford Fusion. The car is a total loss.
"It's gone, and I have nothing really to show for it other than another five-year loan payment," Brothers said.
Neither the city nor the state will take responsibility, so he had to file an insurance claim. The problem is the car was not paid off.
"I still owe $5,500," he said.
His insurer will only pay him $7,000, not the $13,000 he paid for the car. Now he barely has a down payment for a new car.
"Everything would have been good if I didn't have to pay off the rest of the loan, but that's not how the real world works," Brothers said.
For some drivers, it can be much worse. For instance, if you still owe $20,000 on a car loan but the insurance company values it at $15,000 when you wreck it, you will be stuck paying the lender the remaining $5,000.
"The insurance company is going to pay you the actual cash value of the car," explained Insurance Board Vice President Ron Eveligh. "If the loan value is greater of the actual cash value of the car, you, as an individual, are going to have to pay the difference."
Eveligh says that's why GAP Insurance is so important. It covers any gap between what you owe and what the insurance pays off. The Federal Trade Commission recommends purchasing GAP Insurance if your down payment is low or you're leasing your car.
You can buy GAP Insurance from the car dealer or your auto insurer so you don't waste your money.