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Totaled car

Totaling your car can seemingly ruin your year, but it's especially traumatic if you have an upside-down car loan.

An upside-down car loan means you have negative equity or owe more on the vehicle than it is worth.

That's an increasingly common issue as more people take out longer car loans to buy vehicles. 

Experian Automotive said more than 86% of new car buyers take out a loan. The average new car loan is about $30,000 for an average of 68 months. You read that right. The average new car loan is now nearly six years.

To those longer loans, add how quickly a car depreciates and you see why consumers may owe more on their car loans than what the vehicle is actually worth.

How can you avoid getting into this predicament? We'll cover the details for you here.

  • Insurance companies typically pay the actual cash value of the totaled car which may be more or less than the balance owed to your lender
  • An upside-down loan or having negative equity means you owe more on the car than it is worth.
  • Some states require insurers to reimburse the sales tax of your totaled vehicle.
  • Gap insurance is a great option to help cover the difference between actual cash value and what you owe on the loan.

What does it mean when your car is totaled?

If your car is totaled, this means the insurance company has determined that the damages to repair the vehicle are more than the vehicle is worth. In general, that means the damage exceeds 65%-70% of the vehicle's market value.

Instead of paying for repairs, the insurance company will pay you the vehicle's actual cash value (ACV) after you've paid your deductible. That is the vehicle's fair market value the instant before it was damaged in the accident and includes depreciation. Actual cash value is not what it will cost you to replace that same vehicle today, that is called replacement value.

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 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. Instead, it would go straight to the bank. Or the check would be made out to you and your lender for you to sign and send to your bank.

What happens when your car is totaled and you still owe money?

If your car is totaled and you still owe money, your insurer will repay the lender for the car's value. But if the amount from your insurance company is less than the loan amount, you will have to cover the remaining balance.

However, if you carry gap insurance, it will cover the difference between the car's value and how much you still owe on loan. Otherwise, you'll need to keep making payments until the loan is paid off.

How much will insurance pay for my totaled car?

The amount your insurance pays for a totaled car depends on the vehicle. The insurance company usually pays the car's actual cash value (ACV) before the loss minus depreciation, including wear and tear, past accidents, and mileage when a vehicle is totaled.

You could use the reimbursement money and purchase a new vehicle. But the money you receive from your insurance company won't be enough to buy the same car you are currently driving.

Do you still have to pay insurance if your car is totaled?

If the insurance company totals your vehicle and issues you a payout, the car no longer belongs to you and will no longer need to be insured by you. If you have negotiated an agreement with the insurance company to keep the vehicle, you no longer need to insure the vehicle if it cannot be driven. Work with your insurance agent to determine the best solution to avoid paying insurance on a car that can't be driven but also to avoid a gap in coverage.

Can you keep your car if it's totaled?

If an insurer totals a vehicle, many states require the car's title to be changed to a "salvage title." That means you're not able to register for plates until you make repairs to fix the damage. If the repairs are completed, you can apply for a new title.

Often, a damaged car is auctioned off. The auto insurance company keeps the sales' going. However, if you want to keep the car and your state allows it, the insurance company will request bids from salvage buyers to set a fair market value. They will then deduct that amount for your settlement.

This varies by state. So, if you decide you want to keep the car and perform the needed repairs, you'll want to talk to your insurance adjuster to see whether it's worth it.

A word of warning: your insurer may not sell you comprehensive and collision coverage on the rebuilt car. Why? Because an insurer might not know how to estimate value in the previously totaled car. You'll want to keep that in mind if you're thinking about keeping your totaled vehicle.

Does car insurance cover sales tax after a total loss?

Most states require insurers to pay sales tax after you replace your crashed vehicle.

For states that reimburse sales tax, insurance companies will provide that money on the total loss settlement for your original vehicle and not your new car. Here's an example. Let's say your car is totaled and you get $5,000 from your insurer. If you then buy a car that's worth $30,000, your auto insurance company will pay the sales tax on the older vehicle.

If you're in a state that requires insurance companies to pay for those costs, make sure to request the money quickly. Some states also have a 30-day time limit for you to request that reimbursement.

Total loss car insurance settlements and sales tax by state

States vary concerning what they cover regarding sales tax. Here are 10 examples from MWL Attorneys at Law:

  • Arizona -- "All insurance policies must make prompt, fair, and equitable settlements applicable to both first and third-party total loss claims."
  • California -- "Insurer must offer a cash settlement based upon the actual cost of a 'comparable auto,' including all applicable taxes and other fees, or offer a replacement comparable auto including all applicable taxes, license fees, and other fees."
  • Florida -- "When the insurance policy provides for the adjustment and settlement of first-party auto total losses on the basis of ACV or replacement with another of like kind and quality, the insurer must pay sales tax."
  • Illinois -- "Insurer must offer a cash settlement based upon the ACV of a 'comparable auto.' If within 30 days the insured buys or leases a new vehicle, the carrier must pay the applicable sales tax, transfer, and title fees in an amount equivalent to the value of the total loss vehicle, or offer a replacement comparable auto including all applicable taxes, license fees, and other fees; if the insured purchases a vehicle with a market value less than the amount previously settled upon, the company must pay only the amount of sales tax actually incurred and include transfer and title fees."
  • Kansas -- "Insurers have an obligation to pay sales tax and fees for all total loss claims."
  • Massachusetts -- "Insurer is only required to pay for the ACV of a vehicle as of the day of the loss, not the cost to replace it."
  • New York -- "Insurer is required to reimburse the insured with the ACV. This means either repairing the damaged item or replacing it with an item substantially identical including sales tax."
  • Pennsylvania -- "A total loss is settled based upon the pre-loss fair market value of the damaged vehicle plus the state sales tax on the cost of a replacement vehicle."
  • Texas -- "Motor vehicle sale and use tax is not due when an insurer takes title to the vehicle as a result of a total loss. However, motor vehicle sale and use tax is due when the insurer purchases a replacement vehicle for the insured on a total loss claim."
  • Virginia -- "Insurers are only required to reimburse for sales tax, title fees, and transfer fees in third-party claims if the policy so requires."

There are also states that don't have any statutes on the matter, including Idaho, Michigan, Montana, New Hampshire, New Mexico, North Carolina, North Dakota, Wisconsin, and Wyoming. Some of these states don't have sales tax. Most auto insurance policies limit an insurer's liability to the car's ACV or the cost to repair or replace it. So, if you're in a state without a statute, you may not get help with sales tax.

Talk to the insurance adjuster about your state's situation if your insurer totals your car.

Final thoughts: Car insurance doesn't always pay off your totaled car

Unfortunately, even if you have gap insurance to cover the rest of your loan amount, you won't get money to put toward a replacement car.

To have money from your insurance claim to put down on a replacement car, you would need to owe less than your loan amount. In that case, you would receive the money remaining after the lender was paid off. Or if you owned the car outright, all of the money would 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.

Consider a gap policy essential if you can't put a hefty down payment toward the new car.

And don't forget to shop around. When you look for a replacement vehicle, compare car insurance quotes with multiple auto insurance providers to find who will offer you the best rates. 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.

Frequently asked questions

Does my insurance company have to pay the balance owed on my car after it is totaled?

No. Most insurance policies use the actual cash value (ACV) method to determine the amount they will payout on the totaled vehicle. If you owe more on the loan than the actual cash value of the car, you will still owe the remaining balance to your lender.

What are the reasons gap insurance won't pay the balance owed on my totaled car?

It is always best to check with your insurance company before purchasing a gap policy to make sure you know what it covers and does not cover. Some gap policies will only cover factory parts, which means if you have upgrades wrapped in with your loan, there may be additional value there that will not be covered by gap insurance. Additionally, if there are other things included in your loan like an extended warranty, gap insurance will not cover that payoff.

Can a totaled car affect my credit score?

A totaled car does not directly affect your credit score.

However, there could be some indirect effects either positive or negative, of paying off your car. For example, if your car loan is your oldest credit account and you pay it off, you will sometimes see a decrease in your credit score. On the other hand, if your car loan is contributing to a high debt-to-income ratio and you pay it off, it may increase your credit score.

Is repairing a totaled car worth the effort?

The answer to this depends on many factors, including your personal needs. Do your research and carefully consider any investment that will depreciate and see little to no return. Make sure you understand exactly what will have to be done to the car to repair it, how much that will cost and how long the car should reasonably last after repair.

How can I get a new car after a total loss?

It is totally up to you if, when and how you buy a new (or used) car to replace the totaled one.

We recommend doing some research to determine the safest vehicles and cheapest vehicles to insure, then compare those with your vehicle needs and purchase costs before making your decision. It is also important to consider what you have to pay on a down payment if you will be financing a vehicle.

How does a total loss work on a financed vehicle?

If you financed a vehicle and your insurance company declared it a total loss, you are still responsible for paying the remaining loan amount. Usually, the insurance company pays your lender first and gives you the rest of the reimbursement money if there's any money left.

What happens if you total a financed car with full coverage?

If you total a financed car with full coverage, your insurance company will send a payment to your lender for the vehicle's actual cash value, minus any deductible.

How is my car's value decided?

If you own a car, its value is determined by the replacement cost minus depreciation, including wear and tear, age of your vehicle, mileage, and previous accidents. Most insurance companies use a third party to evaluate your car's cash value.

What if the total loss wasn't my fault?

If your car is totaled and it wasn't your fault, then another driver's liability coverage will pay for the damage to your vehicle. But you will only receive the money for the value of your car, not the total replacement cost. If the other driver at fault doesn't have enough insurance, your uninsured/underinsured motorist or collision coverage will help.

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