Is Your Car Worth Less Than Your Loan?
Car loans and leases used to be no longer than 36 months. Today, with vehicles now as expensive as small homes, the length of loans and leases are typically 48 months, 60 months, or even longer. No matter the type of vehicle, coupe, sedan, van, sports utility vehicle, etc., they share a tendency to depreciate very quickly in their first few years of operation. Compare this with the fact that loan and lease payments are spread over a longer period of time. In short order, the amount of the unpaid loan and lease agreement balance becomes much larger than the vehicle's value. This disparity of values, or gap, exists over much of the loan or lease period. Making matters worse is that this gap is usually only discovered after a total loss. The insurer pays the actual cash value of the vehicle and, instead of being reimbursed for your total loss, you have to pay the bank or leasing company thousands of dollars out of your own pocket (and don't forget you have to pay your deductible too).
Nobody is to blame for this problem-not the bank, leasing company, insurer or the car manufacturer; but there are a couple of solutions to the dilemma:
- The Auto Loan/Lease Coverage Endorsement
- This optional coverage is available in most states, from a variety of insurance companies.
Coverage Leased vehicles
Reimburses you for the difference between the amount due under the terms of the lease and the actual cash value of the auto in the event of the auto's total loss.
Coverage Owned vehicles
Pays any outstanding indebtedness incurred by you for that financed new vehicle in the event that there is total loss or damage to the vehicle and the amount due under the finance agreement is greater than the actual cash value of the automobile.
Coverage Partial Losses
On partial losses, the company will normally pay to have the damages repaired or parts replaced, and the lease or loan gap coverage option is not a factor in the loss settlement.
There are exclusions:
- Generally this optional coverage excludes items such as:
- Overdue lease payments.
- Financial penalties imposed under a lease for excessive use, abnormal wear and tear, or high mileage.
- Security deposits not refunded by the lessor.
- Costs for extended warranties, credit life, health, accident, or disability insurance purchased with the loan or lease.
- Carryover balances from a previous lease.
Auto Replacement Cost Coverage
This coverage is still fairly new to the insurance marketplace and its availability varies by state. For an additional premium, an owner of a new car may buy coverage to settle major losses according to the vehicle's replacement cost rather than its depreciated, actual cash value. There are some coverage limitations such as:
- The coverage is usually only available for cars up to six months old
- There may be a maximum dollar amount that applies to a total loss
- The coverage may only be available for the first few years of the car's useful life.
- Considering these limitations, this option is more suited to narrowing, rather than closing the lease/loan gap.
Again, companies usually restrict these options for persons who purchase the coverage soon after they acquire or lease a new vehicle. Companies may not offer this endorsement on used vehicles. The cost for these optional coverages is usually a percentage of an auto's premium that's charged for physical damage to your auto. If you have a newer vehicle and are concerned that you could suffer a large out-of-pocket expense if your car is totaled, you should talk to a qualified insurance professional to answer your questions and, if you choose, to seek the coverage for you.