Financing a new or used car could spell big financial trouble if your vehicle is ever declared a total loss – even if the accident is 100% the other driver’s fault. Here’s what you need to know about staying safe financially if you take out a car, truck, or SUV loan in the future.
Background – The 80% Rule
Many Americans believe if their vehicle is declared a total loss following an accident, insurance companies will provide enough money to cover the cost to replace the vehicle with a similar vehicle. The truth, though, is that insurance companies never provide you with enough money to buy a true replacement vehicle.
The rule of thumb to use when planning is 80%…if the true cost to get the exact same vehicle you were driving before an accident is $30,000, your insurance will only give you 80% of this dollar amount, or $24,000. You’ll have to come up with the other 20%, or $6,000 in this example.
Why not 100%?
Unbeknownst to most of America, the valuation of vehicles deemed a total loss is determined by one company, CCC Intelligent Solutions. Per CCC, their services are used by most of the top 20 insurance companies. Instead of using a fair market valuation method to calculate the replacement cost of your vehicle, CCC uses a model that calculates a value that, when compared to valuation models found at Kelly Blue Book, Edmunds, and NADA, is systemically low.
How to Protect Yourself Financially
Here are some ideas to help you stay financially healthy when purchasing your next vehicle:
Put down at least 20%. An unavoidable accident, even with no medical bills, could place your financial life in chaos. So try to have at least 20% equity in the vehicles you own from the moment you make the purchase or your loan will be underwater leaving you with no room to replace your vehicle with a similar make and model.
Get a vehicle history report. Don’t buy a vehicle that’s been in an accident or has had other major issues such as flood damage. Buying a vehicle history report can help you identify cars, trucks, & SUVs that may create an even greater financial risk if you need to find a replacement.
Build a fund for vehicle repairs and maintenance. Save up for inevitable maintenance and vehicle repairs. You could even use these funds to cover your 20% portion of a vehicle’s replacement cost. Having enough money in this fund is critical. If you need to repair a car after a fender bender AND you do not have enough to cover your share of the cost, you will need to deal with the lender who has a lien on your vehicle. You can quickly find yourself in a financial trap.
Choose shorter repayment terms. While the average car loan length is now well over five years for both new and used vehicles, choosing a shorter repayment term can help you build equity faster. You’ll have a higher monthly payment, but you’ll be in a better financial situation sooner in the event of an accident.
If you’ve been feeling the pinch of higher auto insurance rates along with other rising costs, you should know some factors that impact these rates are well within your control. Consider these tips to pay less this year and beyond.
Improve your credit score. Many insurance companies consider your credit score and overall creditworthiness when assigning rates, mostly because their research shows credit scores directly correlate with how much risk you pose as a driver. This means that if you want to pay less for auto insurance coverage, you should strive to increase your credit score or move your policy to an insurer that does not use this factor in determining rates. Some easy ways to increase your credit score include using less than 20% of your credit line on your credit cards and by paying all your bills on time.
Ask about discounts. Some auto insurance companies have discounts that are not actively promoted. These are often missed by long-time policy holders that do not specifically ask for them. Examples of discounts include lower rates for being a good student, driving fewer miles, purchasing a car with a lower claim history, or discounts for having air bags, anti-lock brakes, and theft detection devices. There are even discounts for federal employees, military members and for being accident-free for a certain number of years.
Pay premiums in advance. Some auto insurance companies also offer pay-in-full discounts that let you save when you pay for six months or a full year of premiums upfront. This discount can result in 10% to 20% lower premiums right off the bat.
Bundle multiple policies. You may be able to score a discount for having multiple types of coverage with a single insurance company, just as you may get a multi-vehicle discount for having more than one car insured. Typical bundled policies include life insurance, auto insurance, home insurance and umbrella coverage.
Tweak your deductible. Your auto insurance deductible — or the amount you pay for certain claims before coverage kicks in — also plays a role in the cost you pay for auto coverage, and higher deductibles can lead to savings. With that in mind, check how your premiums change if you increase your deductible from $500 to $1,000, from $1,000 to $2,500, and so on.
Take a safe driving course. Finally, taking a safe driving course can help lock in lower auto insurance premiums no matter your age or driving history. The amount of savings you’ll get with this discount can vary, so ask your insurer.
Auto insurance rates may not be going down any time soon, but the steps you take now can help you pay lower rates from this point forward. By improving your credit, checking for discounts and tweaking your policy details, you can get the coverage you need for a price you can afford.
Higher property tax bills have accompanied the rising market values of homes over the past several years. If your property taxes have reached the stratosphere, here are some tips to knock them back down to earth.
What is happening
Property taxes typically lag the market. In bad times, the value of your home goes down, but the property tax is slow to show this reduction. In good times, property taxes go up when you buy your new home, but these higher prices quickly impact those that do not plan to move.
To make matters worse, you can only deduct up to $10,000 in taxes on your federal tax return. That figure includes all taxes – state income, property and sales taxes combined! Here are some suggestions to help reduce your property tax burden.
What you can do
Your best bet is usually to approach your local tax assessor and ask for a property revaluation. Here are some ideas to cut your property tax bill by reducing your home’s appraised value.
Do some homework to understand the approval process to get your property revalued. It is typically outlined on your property tax statement.
Understand the deadlines and adhere to them. Most property tax authorities have strict deadlines. Miss one deadline by a day and you are out of luck.
Do some research BEFORE you call your assessor. Talk to neighbors and honestly assess the amount of disrepair your property may be in versus other comparable properties in your neighborhood. Call a few real estate professionals. Tell them you would like a market review of your property. Try to choose a professional that will not overstate the value of your home hoping to get a listing, but who will show you comparable sales for your area. Then find comparable sales in your area that defend a lower valuation.
Look at your property classification in the detailed description of your home. Often times errors in this code can overstate the value of your home. For example, if you live in a condo that was converted from an apartment, the property’s appraised value could still be based on a non-owner occupied rental basis. Armed with this information, approach the assessor seeking first to understand the basis of the appraisal.
Ask for a review of your property. Position your request for a review based on your research. Do not fall into the assessor trap of defending your review request without first having all the information on your property. Meet the assessor with a specific value in mind. Assessors are so used to irrational arguments, that a reasonable approach is often readily accepted.
While going through this process, remember to be aware of the pressure these taxing authorities are under. This understanding can help temper your position and hopefully put you in a better position to have your case heard.
Looking for a way to tackle insomnia? Read your homeowners insurance policy. Kidding aside, it’s worth the effort. This is especially important as insurance costs are going through the roof and too many surprises occur when you need your insurance after an event requires you to file a claim.
Here are some areas that may require a review.
Setting the correct amount. Just like the three bears fairy tale, you can have too much OR too little insurance. Replacement cost is the key, so review if your policy covers only the mortgage or real-estate value, and not the replacement cost. Construction prices have skyrocketed, so the cost of rebuilding a new home on the same lot could shock you. On the other hand, most claims do not require replacing your entire home.
Understanding what is NOT covered. Is your home covered for exterior flooding, or only interior water damage? Does the policy include coverage for mold, sewer backup, earthquakes and hurricanes? Nail down the details and pay close attention to local risks. This is where a great insurance agent can help you understand what surprises they have seen with claims. Get an agent that is transparent with this knowledge, as they see both success and horror stories every day.
Get the right deductibles. You may find that, unlike an auto policy, your homeowner’s insurance doesn’t include a flat-rate deductible for every type of claim. Some policies charge a percentage rate under certain circumstances. Say your house is insured for $300,000 and an earthquake strikes. If the insurer stipulates a deductible of five percent of the policy amount, you may be saddled with $15,000 in out-of-pocket costs before the insurance covers the rest. So explore the correct deductible for your financial situation and understand the policy savings by moving your deductible up or down from its current level.
Understand liability insurance coverage. A standard homeowners insurance policy usually has some level of liability insurance, albeit often at a minimal level. Ask several professionals what level of liability insurance would make sense for your particular situation and be willing to bump up your coverage to protect you and your family in the event that someone is injured while on your property. Many companies offer umbrella insurance to provide additional coverage for claims against you. Review if this is a good addition for your situation.
With homeowners insurance premiums skyrocketing, now is the time to really understand your coverage and the underlying risks you are absorbing. Remember, our natural tendency is to avoid the small print, but by understanding the natural tendencies of insurance companies to shift more of the burden from them to you, this knowledge can be used to motivate yourself to spend some time reviewing the details.
