Here's What Happens if You Owe More Than the Insurance Company Says Your Car Is Worth

Many drivers owe more than the market value of their vehicles. According to data from Edmunds, when people traded in their cars in the first quarter of 2023, the average negative equity value was $5,341. That means drivers owed an average of $5,341 more than what their car was worth at the time of trade in.

For drivers in this situation, it can be a major problem if something happens to their car -- such as a theft or another vehicle that damages it beyond repair. Here's why.

What happens when a car isn't worth what a driver owes?

In this situation, the insurer would evaluate the fair market value of the vehicle and then pay out that amount, minus any deductible on the insurance policy that applies. But, the fair market value could be -- and often is -- thousands of dollars below the amount due on the auto loan.

The auto loan lender still needs to get paid, even if the insurance check isn't big enough to cover the full balance due. A driver with a totaled car could get stuck paying the remaining balance of an auto loan out of their bank account for a car they no longer own or drive.

How to protect against big financial losses

Getting stuck making payments on a totaled or stolen car is a terrible situation. Fortunately, there is a way to make sure auto insurance pays off the full remaining loan balance. Drivers can make sure that happens by buying gap insurance.

Gap insurance pays for the amount left over on a car loan after an insurer cuts a check for the actual cash value of the car. For example, say a driver owed $30,000 on a car and the insurer paid out $24,000 because it felt this was the fair market value after the deductible. Gap insurance in this case would pay for the other $6,000 remaining on the loan and ensure the driver didn't get stuck paying the remaining loan balance.

Gap insurance usually costs around $20 to $40 annually when added to an auto insurance policy. Paying for this added coverage could prevent a huge financial disaster though. Borrowers should seriously consider adding gap insurance to their auto policy until they've paid down the loan enough that the car is worth more than what they owe.

Drivers should check their policies today to make sure they have this coverage if they need it. An insurance agent can help, or drivers can read their policy documents to see if gap insurance is in place. If not, it's a good idea to reach out to the insurer to buy this add-on coverage ASAP before something goes wrong and it's too late.