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

What happens 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. 

"An alternative to gap coverage [is] having an endorsement for new vehicle replacement(usually needs to be brand new current model year depending on company)," says Pope.

File an insurance claim

Whether or not you have gap insurance, you will need to file a collision or comprehensive claimAn insurance claim is a request you make to your insurance company for coverage after your car is damaged or you have an accident. You can file a claim online, by phone, or in writing., 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 valueActual Cash Value (ACV) is the current market value of your car, considering depreciation. It's the amount your insurance will pay if your car is totaled or stolen.. 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.

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

If your car is totaled and you still owe on the loan, you remain responsible for the balance. 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. 

Gap insurance pays the remaining balance of your loan after a total loss. Here is how gap insurance works when your car is a total loss:

1. Your car is declared a total loss. As an example, let's say your car is worth $12,000 based on fair market value, and you owe $15,000 on the loan.
2. Your insurance company pays $12,000 minus your deductible. If you have a $500 deductible, the insurance company will pay $11,500. You will pay the $500. This leaves $3,000 on your loan.
3. Gap insurance covers the remaining loan balance of $3,000.

How does gap insurance work if my car is totaled?

If your car is totaled, you can file a claim with your gap insurance policy to cover any difference between the insurance settlement and what you owe on the loan balance.

Here's how it works:

1. Your car is declared a total loss. The insurance company determines that the vehicle is worth $12,000.
2. You have a $500 deductible, so the total settlement check is $11,500.
3. You owe $15,000 on the loan, so you file a gap insurance claim.
4. Gap insurance pays the $3,000 difference between the settlement and the loan; you pay only your $500 deductible.

What happens to your car loan after a total loss?

A total loss doesn't affect your car loan. You are responsible for paying off the balance whether or not you have the car.

After your insurance pays out the actual cash value of your loan, you are responsible for the balance if any.

Does insurance pay off your car loan if it's totaled?

If what you owe on your car loan is the same or less than what the car is worth, then insurance will pay off your loan. If you owe more than the car is worth, insurance won't pay off your loan.

Insurance will only pay the fair market valueThe price at which property would change hands between a willing buyer and a willing seller, where both parties have reasonable knowledge of the relevant facts and neither party is under any compulsion to buy or sell. of your car, which may be less than what you owe. You won't get more from insurance based on the fact that it's not enough to pay off your loan. If your car is totaled and you still owe on your loan, you are responsible for the difference.

What to do if your insurance payout doesn’t cover your loan

If your insurance payout doesn't cover your loan, you will need to find a way to pay off the balance. There are a few possible ways to do that:

1. Keep making payments. You can simply keep making your monthly payments until the loan is paid off. However, this could make it difficult to buy a new car.
2. Pay off the loan with cash. If you can afford it, simply pay off the loan in cash. This is the best approach if you don't have gap coverage and only owe a small amount on the loan.
3. File a gap insurance claim if you have a policy. It will pay the difference between the settlement and what you owe.
4. Roll the balance into a new car loan. If you're planning to finance a new car and don't have the cash on hand to pay off the previous loan, you can ask about rolling the balance into your new loan. This means you will be paying interest on it, however, so if you can afford to pay it off with cash, you're better off doing that.
5. Borrow the money from a friend. If you don't have the cash to pay it off and don't want to roll it into a new loan, borrowing from someone could help you clear the loan quickly.
6. Take advantage of a 0% credit card promotional offer. As a last-ditch option, you could apply for a promotional credit card that offers no interest for a certain period, allowing you to pay the loan off now and avoid any further interest.

How much will insurance pay for my totaled car?

You insurance company will pay the actual cash value of your car. That means it pays the amount that your car was worth right before it was totaled. The value is based on a variety of factors, including:

• Year, make and model
• Trim level
• Condition
• Mileage

Cars depreciate quickly, so even if your car is new, it will have lost value. Some insurance companies offer new car replacement as an endorsementAn endorsement is a supplement or change to an insurance policy. It amends the original policy and can increase or decrease coverage, change names or update addresses. on their policies. If you have this, the insurer will pay what it takes to purchase another new car. However, you must have added it before the total loss for it to apply.

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.

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. 

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