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I'm not sure how important it is to worry if a car is underwater. I think it depends on your insurance more than anything. As long as they will pay full repair costs/replacement costs for a new vehicle you should be ok (and gap insurance exists for this purpose I believe).

Insurance, including gap insurance, matters the most for people who don't have much in disposable assets. Even then, gap insurance plus auto insurance would just cover the loan if a car was totaled; the unfortunate person who was upside down when his car got totaled would than have no insurance proceeds that could be put toward a replacement vehicle. Absent other assets, he would have to borrow 100% of the replacement cost and end up upside down again when he drove off the lot.

There's a similar phenomenon that happens at the other end of the car's useful life. The car that got totaled by alBambi's suicide attack in 2004 was old but reliable. The insurance company valued it at $2500 at the time it was totaled. There was no way I could buy as reliable a replacement for $2500. I ended up spending about $13K because I needed a car *right now*. Fortunately, I had a good credit score. I was able to get pre-approved for more than I wanted to borrow, and borrow the $9K that I needed because most of my liquidity had just been committed to buying me out of a bad marriage.

FWIW, the dealer said he could get me a good rate. I told him the rate my credit union gave me. He might have been able to match it, but he couldn't do better.

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