My Car Was Totaled But I Still Owe Money on It

If the insurance company deems your car a "total loss", you're still stuck with the terms of your car loan. Learn more.

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Losing your everyday vehicle to a car accident can be a significant disruption to your daily routine. To make matters worse, if your car was financed with a loan and you still owe a balance on that loan, there could be financial repercussions. Read on to learn more about what to do if you still owe money on a car that has been deemed a "total loss".

What is a "Total Loss" Vehicle?

Each automobile insurance company has its own rules in determining whether a car is a total loss following an accident. But typically, when the cost of repairing a car exceeds a certain percentage of the value of the car, the vehicle is declared a total loss. The benchmark percentage most insurance companies use is around 80%.

To apply that to a real world example, let’s say that the insurance company determines that your car was worth $10,000 on the day of the accident. Applying the “80% Rule”, the insurance company will look to see if the cost of repairs will be more or less than $8,000 (which is 80% of $10,000). If the repair costs will be less than $8,000, the car is probably not a total loss and the insurance company will authorize repairs. But if the cost of vehicle repairs is more than $8,000, the insurance company will declare the vehicle a total loss. The insurance company will authorize no repairs in that situation. Instead, the insurance company will write you a check for the value of the car. In this scenario the check will be for $10,000.

To continue with our scenario above, the check you receive from the insurance company will have your name on it as a payee. However, it will also have the name of any lien holder, i.e., the name of any bank or finance company that has loaned you money to purchase the car.

The insurance company is required to include the lien holder as a payee on the check to ensure that the money goes toward paying off any loan you have on the car. This is because any bank or financial lender with which you have a car loan has the right to be paid first out of any total loss proceeds that an insurance company pays out over the vehicle.

What If the Insurance Company’s Payment Isn’t Enough to Pay Off My Loan?

As we all know, cars depreciate in value as they age. Some automobile models depreciate more quickly than others. However, many people wrongly assume that a car’s value is identical to the amount owed on the car loan. While this is occasionally true, it is only by coincidence, and not the result of any rule.

Car values are dictated by the open market, not by the loan amount. A car’s value is determined by such factors as mileage and condition of the car. If you’re curious about the value of your car, one of the more reliable sources to research is Kelley Blue Book (www.kbb.com), which lists the accepted market value ranges for most car models going back several decades.

In the best of circumstances after a total loss, the total loss check you receive from the insurance company will be for a greater amount than the sum you still owe on the car loan. In that case, after paying off the car loan, you might pocket a few hundred dollars that you can put toward purchasing a replacement car.

But what happens if your loan amount is larger than the amount of the insurance company’s check? The very short answer to this question is: you are still legally obligated to make your monthly loan payments to the bank or financial lender until the loan is paid off. The fact that your car was a total loss does not change your loan repayment terms. Your legal obligation to repay the loan continues. The bank or lender still has the right to full repayment of the loan, even though you may no longer have your car.

If you have “gap” insurance, this type of insurance coverage might pay the difference between the amount of the insurance company’s check and the amount you still owe on the car loan. To determine if you have gap coverage, consult the language of your insurance policy or speak with your insurance agent.

Learn more about Resolving a Car Accident Claim.

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