What Happens When You Total a Financed Car?

Most people don’t have enough cash to buy a new or used car. Instead, they borrow money from a lender, use the loan proceeds to pay for the car, and repay the loan in monthly installments over two to eight years. A lot can happen during that time, including a serious car accident.

If your vehicle is damaged in a car accident, an insurance company might decide it’s a “total loss” (totaled). When that happens, you’ll likely have questions: What does “total loss” mean? Is it a good or bad thing? Can I dispute the decision and keep my car?

We'll fill you in on the details below, but here are the key points.

• A total loss determination is based on how much it’ll cost to repair your car, compared to your car’s actual cash value (ACV) at the time of the accident.
• The type of insurance coverage that kicks in to pay for a totaled car depends on the circumstances of the accident.
• In some situations, you might be able to keep, sell, or donate a totaled vehicle.
• If you’re upside down on your car loan—you owe more than your car is worth—GAP insurance can help pay the difference between your totaled car’s ACV and the amount you still owe on your loan.

What Is a Totaled Car?

A “totaled” car is one that a car insurance company decides is a “total loss.” Many states set a threshold for when an insurer must total a car. For example, state law might require an insurer to total a car when the cost to repair it is more than 75% of the car’s ACV. In another state, the threshold might be as high as 100% or as low as 50%. In states that don’t set a threshold, insurance companies typically weigh the cost to repair and salvage a car against the car’s ACV.

For example, let’s say you crash your car into a tree. Fortunately, you aren't hurt, but your car is pretty messed up. Your mechanic estimates that it’ll cost $8,500 to fix. The insurance adjuster says your car’s ACV is $10,000. If the total loss threshold in your state is set at 75%, the insurer will total your car because it’ll cost more than $7,500 to repair. But if a mechanic can fix your car for $5,000, your insurance company will likely reimburse you for the cost to repair it.

Get the basics on car insurance and repair options after an accident.

Can I Keep My Totaled Car?

If you have a sentimental attachment to your totaled car or think it's fixable, you can keep it. But the insurance company will deduct the salvage value of the car (what they would have gotten for it from a junkyard) from your settlement.

The “total loss” designation will be part of your car’s vehicle history. As discussed below, you might find it hard to register, insure, or sell the car in the future.

Can I Dispute the Insurance Company's Decision to Total My Car?

Yes, you can. When you think the insurer has underestimated the ACV of your car, you can:

• ask for a copy of the vehicle valuation report
• provide proof (receipts, photos) of the pre-accident condition of your car and upgrades
• do your own research on your car’s ACV, and
• hire your own appraiser.

Keep in mind that there's no single, absolutely correct number for ACV. Relying on a third party to compute ACV (discussed above) lets the insurer claim its ACV is neutral and objective. Don't fall for it. You can argue that the third party has a financial incentive—keeping the insurance company's lucrative business—to determine ACVs in a range the insurer finds acceptable.

If your research and evidence support a higher ACV than the insurer’s offer, you’ll have more leverage to bargain. Insurance companies have an obligation to negotiate in good faith. If they don’t, you can file a complaint with your state’s insurance commission or better business bureau.

You can also dispute the adjuster’s repair estimate. If you can convince the insurance company that you can fix the car for less than what it's worth, you might be able to avoid a total loss designation.

Do I Still Need Insurance for a Totaled Car?

A totaled car isn’t drivable. So when your car is totaled, you don’t need to continue paying for car insurance. But if you choose to keep your totaled car and repair it, before you can legally drive it you’ll need to:

• get a rebuilt vehicle title from your state’s department of motor vehicles, and
• insure it as required by state law.

Getting insurance with a rebuilt vehicle title is possible, but might not be easy. Some insurers won’t cover rebuilt cars at all. Others offer only liability coverage. If you're persistent, you might find a carrier that offers full coverage policies for rebuilt cars.

The Total Loss Claim Process

The total loss claim process starts with a car accident claim. You’ll either make a claim under your collision coverage, which you should have if your car was financed (a “first-party” claim), or under the at-fault driver’s liability coverage (a “third-party” claim).

Depending on the circumstances of the accident and the specifics of the insurance coverage, you might receive a fair ACV settlement offer quickly. If not, be prepared to negotiate for a better deal. Consider hiring an attorney if you're uncomfortable dealing with the adjuster or haggling over the terms of settlement.

Once you’ve agreed on a total loss settlement, the insurance company will pay out your car’s ACV and you’ll transfer the title to the insurer. We discuss who gets the money below.

Donating a Totaled Car to Charity

You can support a worthy cause and potentially get a tax break by donating your totaled car to charity. But first you'll have to pay it off. Before you complete the donation, speak to your tax advisor to see if you'll qualify for a charitable deduction.

There are a couple of ways to make the donation. First, reach out to your favorite charity to see if they'll take your donation directly or if they work with a car donation service. Second, you can donate it to a national organization like Breast Cancer Car Donations, Cars for U.S. Troops, or Make-A-Wish.

As with keeping a totaled car, the insurance company will deduct its salvage value from your settlement when you give the car to a charity.

What Happens When You Still Owe Money on a Totaled Car?

If your car is totaled after an accident and you haven’t paid off your loan, your options will typically depend on:

• whether you have car insurance and if so, the kind of insurance you have
• your car’s actual cash value (ACV), and
• how much you owe on your car loan.

Let’s take a closer look at how your claim might play out.

When You Have Insurance

When we speak of insurance here, we're talking about collision insurance. That's the coverage that will pay the lender (at least in part) if you wreck your car. Collision insurance isn't required by law, but most lenders will make you buy it when you finance a car.

But there's a potential problem. Your collision coverage might not be enough. Why? Because the insurance company doesn’t care how much you owe on your loan. Unless you buy replacement cost insurance (discussed below), the insurer will only payout your car’s ACV at the time of the accident. Cars depreciate, so your insurance settlement might be thousands of dollars less than what you owe.

For example, say you spin out on an icy road and hit a tree. Your car is totaled. The insurance company says your car’s ACV is $8,000, but you still owe $10,000 on the loan. The insurer will cut your lender a check for $8,000. You're on the hook for the remaining $2,000 loan balance, even though your car is wrecked. (See below to learn how GAP insurance can protect you from this financial risk.)

If your car's ACV is more than the loan payoff, the insurer will pay off your loan first and send you the rest of the settlement. For example, suppose your car's ACV is $8,000 and you owe $2,000. The insurer will pay your lender $2,000 and you get to keep the remaining $6,000.

You're Uninsured and You Caused the Wreck

Driving without liability insurance or other proof of financial responsibility is illegal in most states. And you probably won’t get a car loan without collision coverage.

Things go from bad to worse when you total your financed car while you're uninsured. For starters, the lender will expect you to payoff the loan. When you're the at-fault driver, you'll be on the hook for all your own accident-related expenses (medical bills, property damage). If the accident involves another driver or someone else’s property, you might get sued. Finally, in many states, you can lose your driver’s license and face a hefty fine for driving without insurance.

You're Uninsured and the Other Driver Was to Blame

Let’s say a car rear-ends you at a stoplight. Because the other driver was at fault for the accident, you can file a third-party insurance claim with that driver's insurance company (if they were insured). But the other driver’s insurance company only has to pay the ACV for your totaled car. If there's a shortfall, your lender will look to you for the balance.

What Is GAP Insurance?

GAP insurance (short for “Guaranteed Auto Protection'') covers the difference between your car’s ACV and the amount you owe on your loan. You can typically buy GAP coverage through your car lender or insurance company.

When Might GAP Insurance Be Worth It?

GAP insurance isn’t cheap, and you need it only when you owe more than your car’s ACV. This coverage might be worth having if you:

• put little or no money down for your car
• took out a loan for longer than a few years, leaving you with a high payoff
• drive more than the average person, which will cause your car to depreciate more quickly, or
• bought a car that loses value quickly.

How does it work? Assume you total your sports car. The insurer says the ACV of your car is $25,000, but you still owe $35,000 on the loan. GAP insurance covers the $10,000 difference between your loan balance and the amount of your insurance settlement.

What GAP Insurance Doesn’t Cover

GAP insurance only kicks in when your car is a total loss due to an accident or theft. It typically won’t pay for expenses like:

• car repairs when your car isn’t a total loss
• property damage you cause
• medical expenses
• a rental car, or
• carry-over balances from previous loans.

Other types of car insurance—like liability, collision, and personal injury protection (PIP)—cover accident-related losses when your car isn’t totaled.

How Do I Get a New Car After My Old Car Is Totaled?

Your options—and budget—for buying a new car when your old car is totaled depend on your insurance coverage, how much your car is worth, and how much you owe on the totaled car.

The Best and Worst Case Scenarios

Best case scenario: Your total loss insurance settlement is more than your loan balance. You can pay off your loan and use the rest of the settlement money to shop for a new car.

Worst case scenario: Your total loss insurance settlement is less than your loan balance and you have no GAP coverage. You're stuck with a totaled car you can’t drive and you'll be making monthly payments until the loan is paid off. You can buy a new car with savings or your lender might be able to consolidate what you owe into a new loan.

Think About Replacement Cost Insurance

Some insurers offer “new car replacement” insurance. As the name suggests, this coverage pays to replace your totaled car with one of like make and model. Your settlement should be enough to cover the purchase of a car nearly identical to the one you lost. New car replacement coverage is an add-on to collision and comprehensive coverage for new cars with low mileage.

New car replacement and GAP insurance both lead to larger payouts for totaled cars, but they aren't the same and you’ll have to pay for them separately.

Talk to a Lawyer

If you’ve totaled your car in an accident, it might make sense to talk to an experienced car accident lawyer. Sometimes insurance companies underestimate your car’s value. A lawyer can help you understand your options and will negotiate for a better settlement so you can pay off your car loan.

Learn more about when it's a good idea to get a lawyer's help after a car accident. When you're ready, here's how to find a lawyer who's right for you.