I Totaled My Car and Still Owe Money on the Loan. What Now?

When the car you drive every day is "totaled" in a car accident, your routine can be turned upside down. To make matters worse, you might end up "upside down" on your car loan too (owing more on your loan than your car is worth).

When you total a financed car, here are a few things you need to know:

• Your car's actual cash value (ACV) is how much your car is worth on the day of the accident.
• Insurance companies usually decide a car is a "total loss" when the cost to repair a car is more than the current value of the car, minus its "salvage value."
• When you total a financed car, you are still on the hook for the balance of your car loan.
• Gap insurance can help cover the difference between your car's ACV and what you still owe on your loan.

What Is a "Total Loss" Vehicle?

From the insurance company's perspective, a "total loss" car can be generally defined as one that's not worth fixing, under the circumstances. State laws usually dictate how a total loss (also called a "salvage" or "wrecked") vehicle is defined, often leaving it to the insurance company to assess whether repairing a vehicle is "uneconomical" or "impractical" based on:

• its actual cash value
• the extent of its damage, and
• the cost to repair it.

Some states get more specific, by setting formulas for determining when a car is totaled, sometimes taking into consideration whether it's a "late model" or "high value" vehicle. For example, in Maryland the insurance company has to "total" your vehicle if repairs will cost more than 75 percent of its value. And in Minnesota, a "high value" vehicle (usually defined as one that's less than six years old or is worth more than $9,000) is considered a total loss or "salvage" if its damage amounts to more than 80 percent of its value.

So, let's say you wreck your car in a state that follows an 80 percent rule (the insurer must total the vehicle if the cost to repair it is more than 80 percent of the car's value). Your insurer decides your car's actual cash value (fair market value) on the day of the accident was $10,000. Applying the "80 percent rule," the insurance adjuster will see if the cost to repair your car will be more or less than $8,000 (80 percent of $10,000).

If the repairs cost less than $8,000, the insurer will pay for your repairs. But if repairs cost more than $8,000, your car is a total loss and the insurer won't pay to repair it. Instead, the insurer will essentially buy your totaled car from you. You will provide the insurer with the title of your car in exchange for your car's ACV ($10,000). If your car is financed, the insurance settlement check will go to your lender first to pay off the balance of your car loan and you will receive whatever money is left over, if any.

Can I Keep My Totaled Car?

You might be able to keep your totaled car, but you'll have to pay for it. Insurers typically auction off totaled cars to car dealers or scrappers for parts. So, if you decide to keep a totaled car, the insurer will deduct the salvage price from your insurance settlement. For example, if your car's ACV is $5,000 and the insurer can get $500 from a salvage buyer for it, your insurance settlement will be $4,500 ($5,000 - $500).

Totaled cars can be expensive to repair. Most states require you to get a salvage title for a totaled car. Cars with salvage titles are hard to sell and insure. Think carefully about whether keeping a totaled car is worth the cost and potential headaches.

Will I Still Have to Pay Insurance on a Total Loss Car?

Once a car is totaled and you sign the title over to the insurance company, the car no longer belongs to you and you don't have to pay to insure it. To legally drive a car that was totaled, you have to have the car inspected, get a "rebuilt" title, and purchase new insurance.

Do I Still Need to Pay My Car Loan?

If you total a financed car, you are still on the hook for the balance of your loan. Gap insurance can help cover the difference between your car's ACV and what you owe on your loan.

What Happens If I Still Owe Money on a Total Loss Car?

Most people don't have enough cash to buy a new or used car. Instead, they borrow money from a lender (usually a bank or credit union) to buy the car and then pay the lender back in monthly installments over several years. So, what happens when you still owe your lender money for a totaled car? The answer depends on many factors, including:

• your car's actual cash value at the time of the accident
• who's at fault for the accident
• insurance coverage, and
• how much you owe on your loan.

Your Car's Actual Cash Value

Your car's actual cash value (ACV) is the value of your car on the day of the accident. Insurers typically look at the sale price of similar vehicles in your area to determine the ACV. Insurers might also use valuation tools like the Kelley Blue Book to figure out a car's ACV.

Your car's ACV isn't directly connected to your car loan. Your car's AVC might be more or less than your car loan at the time of your accident. If you owe more to your lender than your car's ACV, your insurance settlement might be less than your loan balance.

What Happens to My Loan If I Have Insurance?

Most lenders require you to get car insurance when you take out a car loan. But your car insurance coverage might not be enough to cover your entire loan when your car is a total loss. Remember: Your insurer will pay only for your car's ACV, not the balance of your car loan.

If you total a car in an accident, you can typically make a collision coverage claim with your own insurance company, no matter who was at fault for the car accident. If your car is totaled by a falling tree branch, fire, or other non-collision accident, your comprehensive coverage will likely cover it.

But your insurer doesn't care about the balance of your loan. Your total-loss insurance payout will be for your car's ACV only. If you owe more money on your loan than your insurance settlement, you are still responsible for paying the difference. Most insurers offer "gap" coverage, which pays the difference between your car's AVC and your loan balance.

What Happens When You Total a Financed Car Without Insurance?

Most states require drivers and car owners to have some form of liability insurance or proof of financial responsibility to drive or register a car. Liability coverage pays for other people's injuries and property damage when you are legally responsible (liable) for an accident.

Collision coverage is optional coverage that pays for damage to your car—minus your deductible—no matter who is at fault for the accident. If you total your car in an accident that you caused without collision coverage, you have to pay out of pocket to replace your totaled car.

Even if you are not at fault for the accident, your compensation might be limited if you don't have insurance. Several states have "No Pay, No Play" laws. In these states, if you don't have car insurance at the time of an accident, your ability to recover damages is restricted or barred entirely.

Learn more about what happens when you're in a car accident and uninsured.

What Happens to My Loan If the Other Driver Is At Fault for the Accident?

If the other driver is at fault for the accident, that driver's liability coverage should cover your car's ACV, which will pay off part or all of your car loan.

But what happens when you are in an accident with an uninsured driver? When your car is totaled by a person who doesn't have car insurance, you'll likely have to rely on your own insurance to cover your losses.

You can purchase underinsured or uninsured motorist coverage (UMI) to help pay off your loan and replace your totaled car when you're in an accident with an uninsured driver. Be sure that your UMI policy covers property damage—some policies only cover car accident injuries. You can also file a claim under your collision coverage.

You can also file a civil lawsuit against the at-fault driver, but it might not be worth the expense unless you know that driver has assets you can recover.

What Happens to My Loan If I Am At Fault and I Don't Have Insurance?

If you're the at-fault driver in an accident and you don't have insurance, you will be stuck with a car payment for your totaled car until the loan is paid off. You will be on the hook financially for any damage you cause and you might face penalties for driving without insurance, including fines and a driver's license suspension.

What If Insurance Doesn't Cover the Entire Balance of My Car Loan?

The best way to explain what happens if insurance doesn't cover the entire balance of your loan is to look at an example.

Let's say your totaled car's ACV is $10,000. If you still owe $12,000 on your car loan, your insurer will cut your lender a check for $10,000 and you'll still owe $2,000.

As painful as it is, you're legally obligated to make your monthly loan payments to the lender until the loan is paid off. The fact that your car is a total loss doesn't change your loan repayment terms. Your lender still has the right to full repayment of the loan, even though you can no longer drive your car. Gap insurance can protect you from this financial risk.

What Is Gap Insurance?

Gap insurance (short for "Guaranteed Auto Protection") covers the difference between your car's ACV and the amount you owe on your car loan. You can typically purchase gap insurance through your lender or insurance company.

You typically only need gap coverage if you might find yourself upside down on your loan at some point. Factors that might turn you upside down on your car loan include:

• an extended loan term
• putting little or no money down, and
• financing fees and extras on top of the purchase price (like sales tax, registration fees, warranties, and service plans).

Some cars depreciate (lose value) faster than others. Research your car's depreciation using tools like Kelley Blue Book online. Compare your car's ACV with your insurance coverage to figure out whether you need gap protection.

Before you buy gap protection, look at your existing car insurance policy to make sure you're not already covered. Gap insurance is included in some standard insurance policies.

Learn more about whether you need gap insurance.

When Does Gap Insurance Not Pay Out?

Gap insurance only kicks in when your car is totaled or stolen to cover the difference between your car's ACV and the current outstanding balance on your loan.

Gap insurance doesn't cover:

• car repairs
• replacement parts
• a new car
• a rental car after an accident
• medical bills
• lost wages, and
• damage to other people's property.

Can a Lawsuit Cover My Loan Balance If I Don't Have Gap Insurance?

If you don't have gap insurance to cover the difference between your total loss settlement and your loan balance, you can try to negotiate with the insurance company.

An insurance company is required to pay fair market value for your car. If you don't agree with the settlement offer from the adjuster, you can counter with your own research. You'll need the current sales price for cars in your area of a similar year, make, model, and trim package. You can use the Kelley Blue Book value or online listings for comparison. The more evidence you have of your car's condition right before the accident, the more convincing your argument will be.

If negotiations aren't going well, you should talk to an attorney. You might be able to file a "bad faith" claim against the insurance company handling your claim, ask for arbitration, or file a lawsuit.

How Do I Get a New Car After My Old Car Is Totaled?

Your ability to shop for a new car after a total loss often depends on your insurance settlement.

If you own your car free and clear you can use your entire settlement check to purchase a new car. If you total a financed car, and the car's ACV is more than your loan balance, you can use your insurance settlement to pay off your loan and shop for a new car with whatever's left. If you owe more than your car's ACV, you can buy a new car with savings or your lender might be able to consolidate what you owe into a new car loan.

Do I Need a Car Accident Lawyer?

If you've totaled your car in an accident, it might make sense to handle your car accident claim yourself, if you're comfortable with the process. That's especially true if you think the insurance company's numbers are fair in terms of the value of your vehicle, what it would take to repair it, and what they're offering you to settle. But it might make sense to talk to an experienced car accident lawyer if you're not getting a fair settlement offer from the insurance company, or if your crash also led to injuries. Learn more about getting a lawyer's help after a car accident.