If you get into a car accident in a financed or leased vehicle, you will still be responsible for paying the remaining balance on the car loan or lease. This is true even if the vehicle is deemed a total loss, meaning an insurance company has determined that the actual cash value of the vehicle is less than the price of vehicle repairs. If your car is totaled, it is not roadworthy and cannot be driven – yet you must still pay any remaining amount owed on the purchase or leasing agreement. Your loan does not disappear.
If you have a car loan, you will most likely need gap insurance to help you pay for an accident. Gap – or Guaranteed Asset Protection – insurance can save you from having to pay the remainder of your car loan out of pocket after a car accident. Gap insurance works by covering the difference between your vehicle’s actual cash value after a car accident and what you still owe on the loan or lease.
The issue with having a car payment in a car accident case is that a motor vehicle immediately depreciates in value when it is driven off the lot. Thus, the actual cash value of the vehicle at the time of the accident is less than what the buyer paid for the car. When an insurance company appraises a vehicle to determine a suitable amount in property damage compensation, the amount assigned will most likely be less than the full value of the buyer’s loan. Gap insurance covers this difference.