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When your totaled car isn't paid off

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Totaled car

Totaling your car can ruin your year, but it's especially traumatic when you still owe money on the vehicle.

That's an increasingly common fact as more people need to 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.

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

If your vehicle is totaled and you still owe more than it's worth, your car insurance company will pay you only the vehicle's actual cash value (ACV). That is the vehicle's fair market value the instant before it was damaged in the 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 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 could go straight to the bank. Or the cheque would be made out to you and your lender for you to sign and send it 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). 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 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 to put down on a replacement car, you would have needed to owe less than your loan amount. If you had, you would have received the money remaining after the lender was paid off. Or if you 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.

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

Recovery of sales tax after 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 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.

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 insurer takes title to 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 your insurance adjuster about your state's situation when your insurer totals your car.

Owning a car after 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,cyou 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.

Shop around for car insurance

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.