Most people don't have enough cash to buy a new or used car. Instead, they borrow money from a lender, pay the seller for the car, and pay the loan back in monthly installments over two to eight years. A lot can happen during that time, including a serious car accident. This article outlines what happens when you still owe money on 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. Your insurance company says your car's ACV is $10,000. If the total loss threshold in your state is set at 75%, your 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.
If you have a sentimental attachment to your car or think you can fix it, you can keep your totaled car. 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 and you might have a hard time registering, insuring, and selling the car in the future.
If your car is totaled, you don't need to continue to make car insurance payments. A totaled car isn't drivable.
If you choose to keep and repair your totaled car, you'll likely need to get a rebuilt title from your state's department of motor vehicles and insurance before you can legally drive it. Getting insurance with a rebuilt title is possible, but not easy. Some insurers won't cover rebuilt cars at all, others offer liability coverage only. If you are persistent, you might find a carrier that offers full coverage policies for rebuilt cars.
If your car is totaled after an accident and you haven't paid off your loan, your options will typically depend on:
Let's take a closer look at how your claim might play out.
Most lenders make you get car insurance when you finance a car. But the coverage your lender requires might not be enough when your car is totaled. Why? Because insurance companies don't care about how much you owe on your loan. They only payout your car's ACV at the time of the accident. Cars depreciate (lose value over time), so your insurance settlement might be thousands of dollars less than what you owe on your loan.
For example, let's say you spin out and hit a stop sign. Your car is totaled. The insurance company says your car's ACV is $8,000, but you still owe $10,000 on your loan. The insurer will cut your lender a check for $8,000. You still have to pay the remaining $2,000 on your loan, 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 you owe on your loan, the insurer will pay off your loan first and you will get to keep the rest of the settlement check. For example, if your car's ACV is $8,000 and you owe $2,000, the insurer will pay your lender $2,000 and you $6,000.
For tips on what to do if you disagree with the insurer's valuation of your car, check out: The Insurance Company Says My Car is a Total Loss—What Now?
Driving without insurance or other proof of financial ability is illegal in most states. And you typically can't get a car loan without insurance. If you do total your financed car in an accident while you don't have car insurance, you will have to continue to make loan payments until your loan is paid off. You will also have to pay for all accident-related expenses (medical bills, property damage) out of pocket. If the accident involves another driver or someone else's property, you might get sued. You can also lose your driver's license and face a hefty fine for driving without insurance.
Let's say a car rear-ends you at a stoplight. If the other driver is at fault for the accident, you might be able to file a claim with that driver's insurance company (assuming you aren't dealing with an uninsured driver). This is called a "third-party insurance claim." Whether you're dealing with the other driver's insurance company or your own, an insurer will only pay out the ACV for a totaled car.
Insurance companies aren't required to pay your car loan balance. Insurers only pay out the fair market value (ACV) of a car on the day of the accident. For example, let's say you fall asleep at the wheel and hit a guardrail. Thanks to your airbags, you're okay, but your car is totaled. You have full coverage, including collision and comprehensive. Your insurer decides that the ACV of your car is $18,000. But you still owe $25,000 on your car loan.
Your insurer will pay your total loss settlement—$18,000—to your lender. You will be on the hook for the remaining $7,000 on your loan. Gap insurance can help cover the difference between your car's ACV and what you owe on your loan.
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 loan lender or insurance company.
Gap insurance isn't cheap and you need it only when you owe more than your car's worth. Gap insurance might be worth having if you:
For example, let's say you total your sports car. The insurer says the ACV of your car is $25,000, but you still owe $35,000 on your loan. Gap insurance can cover the $10,000 difference between your car loan balance and insurance settlement check.
Gap insurance only kicks in when your car is a total loss due to an accident or theft. Gap insurance typically won't pay for expenses like:
Other types of car insurance—like liability, collision, personal injury protection (PIP)—cover accident-related losses when your car isn't totaled.
Insurance companies aren't required to pay off your car loan balance. They are on the hook for your totaled car's fair market value. The idea is that you will be able to replace your totaled car with your total loss settlement money. But things don't always work out that way when you finance your car. So, what do you do when you total your car and you're upside down on your loan?
If you don't have gap insurance to cover the difference between your total loss settlement and your loan balance, you can try to negotiate with the insurance company. You can use online tools or your own appraiser to try to convince the insurer that your car's ACV is at least as much as your loan balance. If the insurer won't budge, talk to a lawyer. A lawyer can talk you through your options, including a potential civil lawsuit, and try to help you get a better settlement offer.
Your options—and budget—for purchasing 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 your car.
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 insurance. You are stuck with a totaled car you can't drive and a car payment 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.
Some insurers offer "new car replacement" insurance. This type of coverage pays the value of a car of the same make and model if your car is totaled. New-car replacement insurance is typically limited to newer cars and it's often more expensive than gap insurance.
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 fair market 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 getting a lawyer's help after a car accident.