|Answer: Sometimes, the value of a car is less than the balance on your loan. There can be several reasons for this. Interest rates changes may have increased the amount of your loan, rebates may not have been applied to the purchase price, or poor maintenance of the auto may have reduced its value.
The insurance companies base their payments on actual cash value (ACV) of the car, not the amount of your loan. In some states you may be able to purchase a special type of insurance, known as guaranteed auto protection (GAP), when you buy a car. GAP insurance covers the difference between the ACV and the balance of your auto loan.