This is why gap insurance is so important

One single mom learned the hard way why this type of insurance is necessary.

Vanessa Carnes is a single mom with dreams of becoming a nurse, to help build a better life for her and her young daughter.

But one month after buying a used 2010 Honda Accord, the car caught fire as she was driving home.

“I got out of the car just in time before the whole front end started going up in flames,” she said.

Carnes escaped unharmed. But the car was a total loss.

Still has to pay off loan

The hurt got worse when her insurer Geico offered her just over $4,000 for the car she bought for more than $10,000 just a month earlier.

“They are only paying Blue Book value on the car, so they are only paying a little over $4,000 on the car, which leaves me almost $7,000 still to pay on the car,” she said.

Carnes’ dreams of attending nursing school in the fall, like her Honda, were going up in smoke. Her aunt, Amberly Browning, said she likely won’t be able to afford school if she still has to pay on the car she no longer has.

“Something has to be done,” Browning said. “It was just three weeks of having a car. You don’t go into a dealership to buy a car and expect it to only last three weeks.”

As for why the car caught fire, the insurance company has not completed its investigation. Some Honda Accords have been recalled for fire risks over the years, due to leaking power steering fluid, but not Carnes’ 2010 Accord EX.

Warning to anyone with a low down payment

But the financial bind Carnes found herself in can happen to almost anyone with a car loan, if your car is totaled in the first year of ownership.

The problem is that unless you make a major down payment, you are typically “upside down” on your loan that first year, owing more than the car is worth.

For instance, assume you bought your car for $20,000. A few months later, the insurance company values it at just $15,000 (as its trade-in value). If it is totaled, you still have to pay the lender $5,000.

Insurance agent Ron Eveleigh explained: “The insurance company is going to pay you the actual cash value of the car. If the loan value is greater than the actual cash value of the car, you as an individual are going to have to pay the difference.”

There is no way to be “forgiven” on it.

Eveleigh says that’s why gap insurance is so important. Gap insurance covers the gap when you owe more than the value and typically costs just another $20 or $30 a year.

Edmunds.com recommends it if your down payment is less than 20 percent of the cost of your car, or if your loan is longer than five years.

Carnes only learned about gap insurance after it was too late.

“I worked really hard to get the money up for a down payment for this car, and now I got screwed,” she said.

However, Carnes has now received some good news. After we contacted Geico, the insurer agreed to re-examine her claims, and has just told her they will offer her another $2,000 for her burned up car.

The dealer where she bought it, meanwhile, told us they will lower the price of another used car for her, so that she can get back on the road at close to her original payment and get her career back on track.

In the future, she says, she’ll be purchase gap insurance.

Good advice, so you don’t waste your money.

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