I totaled my car last week. I found out I owe more than it’s worth. Will my auto insurance provider pay off the whole loan or just the car’s value? How do I get money toward a replacement car?
Your car insurance company will pay only actual cash value (ACV) for your vehicle. That is the fair market value of your vehicle the instant before it was damaged in the auto accident.
Auto insurance providers never pay more than the value of the vehicle when it is deemed a total loss. (See "Understand your options for a totaled car.")
Your collision deductible will be deducted from the actual cash value. Say you owe $20,000 and your vehicle is found to be worth $15,000 at the time of the accident and you have a $1,000 deductible. Your car insurance company would pay out $14,000 for your totaled vehicle.
The money wouldn’t come directly to you because your car is financed. It could go straight to the bank. Or, the check would be made out to you and your lender for you to sign and send it on to your finance company.
In the above scenario, you’d still end up owing your lender $6,000. This money will need to come from you -- unless you have gap insurance.
Gap insurance is wise to have if you’re upside down on your car loan (owe more than the car is worth), because it will pay the difference between the actual cash value of your vehicle and what is still owed on your car. Some gap insurance policies will even cover your collision deductible.
Insurance fixes your car, not your finances
Unfortunately, even if you do have gap insurance to cover the rest of your loan amount, you won’t be left with money to put toward a replacement car.
To have money to put down on a replacement car, you would have needed to owe less than your loan amount. If you had, then you would have received the money remaining after the lender was paid off. Or had owned the car outright, all of the money would have come to you to put toward a new car.
But your insurance company isn’t obligated to buy you another car, just to pay you the pre-accident value of your old one.
If you can’t put a hefty down payment toward the new car, consider a gap policy essential. You’ll been burned once already.
When you do get a replacement vehicle, compare car insurance quotes with multiple auto insurance providers to find who will offer you the best rates. With this accident on your record, you could save hundreds, or more, by shopping around and finding the insurer that doesn’t rate as severely for an accident on your record.