My Car Was Totaled But I Still Owe Money on It

If an insurance company totals your car, you're still stuck with the terms of your car loan.

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  • 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 than your car is worth). This article explains what happens when you still owe money on a totaled car. Learn more about:

    • your car's actual cash value (ACV)
    • how insurance companies decide a car is a totaled
    • what happens when you total a financed car, and
    • how gap insurance can help.

    What is a Total Loss Car or Vehicle?

    A "total loss" car is a car that an insurance company decides is not worth the cost to fix. Most states have formulas for determining when a car is totaled. State law might say, for example, that an insurer has to total a car when the cost to repair it is more than 80% of the car's value.

    So, let's say you wreck your car. Your insurer decides your car was worth $10,000 on the day of the accident (your car's actual cash value). Applying the "80% Rule," the insurer will look to see if the cost of repairs will be more or less than $8,000 (80% of $10,000). If the repairs cost less than $8,000, the insurer will pay for your repair costs. But if repairs cost more than $8,000, your car is a total loss and the insurer won't pay to repair it. Instead, your insurer will cut a check for the actual cash value of your car ($10,000).

    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) 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:

    • your car's actual cash value
    • your car insurance, and
    • how much you owe on your car 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.

    Notice that 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 then your insurance settlement might be less than your loan.

    Your Car 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 only pay for your car's ACV, not the balance of your car loan.

    So, 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 to your lender. 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. Learn the basics: Gap Insurance for Your Car: Do You Need It?)

    If your car's ACV is more than the amount you owe on your loan, you're in much better shape. Let's say your car's ACV is $10,000 and you owe $6,000. Your lender will get paid first ($6,000) and you'll get the rest ($4,000).

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

    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 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 (tax, license, registration) and extras (warranties, service plans) on top of the purchase price.

    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 policy to make sure you're not already covered. Gap insurance is included in some standard insurance policies.

    Talk to a Lawyer

    If you've totaled your car in an accident, you might want to talk to an experienced car accident lawyer. A lawyer can help you understand your car's actual cash value (ACV) and negotiate for a fair settlement. Learn more about getting a lawyer's help after a car accident.

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