What Happens When You Total a Financed Car

If your financed vehicle is deemed a "total loss" after an accident, gap insurance can help.

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.

What Is a Totaled Car?

A "totaled" car is one that a car insurance company decides is a "total loss." Most 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 formula 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.

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:

  • what type of car insurance you have (including gap insurance)
  • 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.

If You Have Insurance

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 pay out for 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?

If You Don't Have Insurance

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.

If The Other Driver Is at Fault

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.

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 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:

  • put little or no money down for your car
  • took out a loan for longer than a few years
  • drive more than the average person, or
  • bought a car that loses value quickly.

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.

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 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.

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