Your car may be worth less than your car loan - why is that a problem?

March 26, 2019, Kitchener, Ontario

Posted by: Robert Deutschmann, Personal Injury Lawyer

Most of us take out a car loan to buy a car. Most loan companies require collision insurance to ‘protect’ the collateral of the loan. Insurance is required by law in Ontario and it has a few component parts. Liability, comprehensive and collision. The collision portion of the premium is meant to compensate you for the damage to the car in a collision. It should pay the amount required to repair the car minus the deductible portion that you are responsible for.

The problems usually start when the damage to the vehicle is estimated to exceed the worth of the vehicle in which case the insurance company cuts you a cheque for the value of the car. This amount is determined using factors such as make, model and mileage/age. They consider general condition of the car and the book value. Generally, the car is ‘worth’ a lot less to the insurance company that to the owner.  You can negotiate with the insurer on this amount but at the end of the day they will pay what they deem reasonable.

As car prices have increased over the years loan lengths have become longer. Loan periods as long as 84 months / 7 years are not uncommon. The component costs in cars have also increased dramatically over the last 15 years. Airbags, all of the onboards safety equipment such as lane change sensors and back up cameras are all very expensive. It is NOT very difficult to damage a car in an accident in such a way that repairing costs over $10,000. In fact, often a minor accident can write off a car that is only a few years old.

J.D. Power examined this question and found that 30% of Canadians who are trading in their cars owe more than $7000 on it still. Getting into an accident that writes off a new car within a year of its purchase can easily end in you owing far more money on it than it is worth due to the rapid depreciation of a car in the first year.

How can you protect yourself from being underwater in the event of totaling your car?

All insurance companies off something called a Limited Waiver of Depreciation on new or demo cars. It removes depreciation rom the equation and can last for 24 – 0 months depending on the policy and company. If you purchase this additional waiver then you will receive the full purchase price you paid for the car in the event of a write off. The waiver is generally quite cheap ($50-$100 a year) and is well worth it in the event you write total your car.

You can also purchase something called a Replacement Vehicle Coverage waiver from some insurance companies. This is a very comprehensive coverage that allows you to replace your totaled car with the current model year of the same or equivalent model in the event of a write off. This endorsement has a premium that rises each year. The premium can be quite high for this coverage.

Your third option to protect yourself from having to pay a car loan for a car you no longer owe is to buy Gap Insurance which is purchased at the car dealership. Gap Insurance covers the difference between what the insurer pays out in the event of a total write off and what you owe on the car. Pricing varies.

Please consider all of these options when you are insuring your vehicle. The chance of writing off your vehicle in a car accident is much higher today than it was even a decade ago. The last thing you want to have happen after making it through a car crash is to find out you still owe years of payments on the car that you no longer own.

About Deutschmann Law

Deutschmann Law serves South-Western Ontario with offices in Kitchener-Waterloo, Cambridge, Woodstock, Brantford, Stratford and Ayr. The law practice of Robert Deutschmann focuses almost exclusively in personal injury and disability insurance matters. For more information, please visit www.deutschmannlaw.com or call us at 1-519-742-7774.

It is important that you review your accident benefit file with one of our experienced personal injury / car accident lawyers to ensure that you obtain access to all your benefits which include, but are limited to, things like physiotherapy, income replacement benefits, vocational retraining and home modifications.