What happens when you owe more than your totaled car is worth?

What to do when your car is totaled and you still owe money

If your car is stolen or totaled in an accident or other covered disaster, your insurer will repay the lender – not you – for the car's current market value. But if the amount from your insurance company is less than what you owe on the loan, you will have to cover the remaining balance.

Here are the steps you can take if you find yourself in a situation where your car is totaled but you still owe money: 

Check to see if you have gap insurance

If you have a loan or lease agreement, your financial institution probably will require that you purchase a gap insurance policy. Not all car insurance companies offer gap insurance. You can also purchase gap insurance from some car dealers and lenders. 

File an insurance claim

Whether or not you have gap insurance, you will need to file a collision or comprehensive claim, whichever of those two is appropriate given the situation. 

Wait for your insurer’s decision

Once your claim has been reviewed and accepted, your insurer will agree to a payout in the amount of your car’s actual cash value. The balance of your car loan could exceed this amount, leaving you responsible for the gap between the car’s actual cash value and the balance of your car loan. 

Pay off the remainder of the car loan

If you do not have gap insurance and there is a difference between the car’s actual cash value and how much you owe on the car loan, you will need to keep making payments until the loan is paid off.

What does it mean when your car is totaled?

If your car has been declared a total loss or totaled, it means the insurance company has determined that the damages to repair the vehicle would cost more than the vehicle is worth. That generally means the damage exceeds 65% to 70% of the vehicle's current market value.

Instead of paying for repairs, the insurance company will pay your lender 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 vehicle's value 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.

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.

How can you avoid owing money on a totaled car?

The best way to avoid paying out of pocket when your car is totaled is to make sure you aren't upside down on the car. That means making sure you don't owe more on the car than it's worth.

There are two ways to avoid being upside down on a car:

• Put down a big down payment. The larger your down payment, the less you will have to finance, and the lower the risk of being upside down.
• Choose a shorter finance term. The longer the period over which you stretch your payments, the more you'll pay in interest and the slower you'll pay down the balance. That increases the risk of being upside down.

According to Edmonds, a car buying resource, the average car loan length has crept up in recent years to 72 months. Some drivers are even taking out 84-month loans. Longer loan lengths mean the car will likely depreciate faster than you're paying off your loan. And if the car is totaled while you still owe, it might not be worth enough to pay off the balance.

Cars do depreciate fast. If you can't put down a big down payment or have to take a longer term to make the loan payments affordable, consider buying gap insurance to protect yourself.

Can you keep your car if it's totaled?

If an insurer declares a vehicle totaled, many states require the car's title to be changed to a salvage title. That means you can't 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 from your settlement.

This amount varies by state. 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 the value of the previously totaled car. You'll want to keep that in mind if you're considering 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, typically 5% to 9%, depending on the state.

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, an insurance law firm based in Hartford, Wisconsin:

• 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."

Some states 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.

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 whatever money remains after the lender has been paid off. Or, if you owned the car outright, all of the money would come to you to put toward a new car. In the latter case, you probably would not have gap insurance.

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.

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.

If the other driver was responsible for the accident, it is possible that the driver’s insurance company will be responsible for the payment. If this happens, you might not even owe a deductible. 

Remember that the actual cash value of a car is how much the car was worth on the day the accident occurred, not the price you paid for the car. If you have not purchased gap insurance, you will be financially responsible for any separation between what the car is worth and what you owe on the car loan. 

Do I still have to make payments on a totaled car with gap insurance?

If your car is declared a total loss, it does not relieve you of the obligation to pay off the car loan. Without gap insurance, you would need to make the remaining payments until you have paid off the car loan. 

However, if you did purchase gap insurance, the insurer will pay off the amount remaining on the loan. You will not have to pay off the remainder of the loan out of pocket.