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 repay the loan in monthly installments over two to eight years. A lot can happen during that time, including a serious car accident. This article describes what happens when you still owe money on a totaled car.
what is a wrecked car?
A “totaled” car is one that an auto insurance company decides is a “total loss.” Many states set a threshold for when an insurer must total a car. For example, state law may require an insurer to pay in full on a car when the repair cost is more than 75% of the car’s ACV. in another state, the threshold can be as high as 100% or as low as 50%. In states that don’t set a threshold, insurance companies often weigh the cost of repairing and salvaging a car against the car’s ACV.
For example, suppose you crash your car into a tree. Fortunately, you are not hurt, but your car is quite damaged. Your mechanic estimates it will cost $8,500 to fix. Your insurance company says the ACV on your car is $10,000. If the total loss threshold in your state is set at 75%, your insurer will total your car because it will 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 of repairing it.
Get the basics on car insurance and repair options after an accident.
can I keep my wrecked car?
If you’re romantically attached to your car or think you can fix it, you can keep your wrecked car. but the insurance company will deduct the salvage value of the car (what they would have gotten at a junkyard) from your settlement.
The “total loss” designation will be part of your car’s vehicle history and you may have difficulty registering, insuring and selling the car in the future.
Do I still need insurance for a wrecked car?
If your car is totaled, you are not required to continue making car insurance payments. a totaled car cannot be driven.
If you choose to keep and repair your damaged car, you’ll likely need to obtain a rebuild title from your state’s department of motor vehicles and insurance before you can drive it legally. Getting insurance on a rebuilt title is possible, but it’s not easy. Some insurers won’t cover rebuilt cars at all, others only offer liability coverage. If you’re persistent, you may be able to find a company that offers full coverage policies for rebuilt cars.
what happens when you still owe money on a wrecked car?
If your car is totaled after an accident and you haven’t paid off your loan, your options will generally depend on:
- what type of car insurance you have (including gap insurance)
- the actual cash value (acv) of your car and
- how much you owe on your car loan .
Let’s take a closer look at how your claim could turn out.
if you have insurance
Most lenders require you to obtain auto insurance when you finance a car. But the coverage your lender requires may not be enough when your car is totaled. why? because insurance companies don’t care how much you owe on your loan. they only pay for your car’s acv at the time of the accident. Cars depreciate (lose value over time), so your insurance settlement could be thousands of dollars less than what you owe on your loan.
For example, let’s say you turn and hit a stop sign. your car is wrecked. The insurance company says the ACV on your car is $8,000, but you still owe $10,000 on your loan. The insurer will give your lender a check for $8,000. You still have to pay off the remaining $2,000 on your loan, even though your car is totaled. (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 get to keep the rest of your 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 will pay $6,000.
For tips on what to do if you disagree with the insurer’s appraisal of your car, see: Insurance Company Says My Car Is a Total Loss, Now What?
if you don’t have insurance
Driving without insurance or other proof of financial ability is illegal in most states. And you usually can’t get a car loan without insurance. If you lose all of your financed car in an accident while you don’t have auto insurance, you’ll have to continue making loan payments until your loan is paid off. You will also have to pay all expenses related to the accident (medical bills, property damage) out of pocket. If the accident involves another driver or someone else’s property, you may be 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 you’re rear-ended by a car at a traffic light. if the other driver is at fault for the accident, he may be able to file a claim with that driver’s insurance company (assuming he’s not dealing with an uninsured driver). this is called a “third party insurance claim.” Whether he’s dealing with the other driver’s insurance company or his own, an insurer will only pay ACV for a totaled car.
what if the insurance agreement doesn’t cover the car loan balance?
Insurance companies are not required to pay the balance of your car loan. Insurers only pay the fair market value (ACV) of a car on the day of the accident. For example, suppose you fall asleep at the wheel and hit a railing. Thanks to your airbags, you’re fine, but your car is totaled. You have full coverage, including collision and comprehensive. Your insurer decides that the ACV on your car is $18,000. but you still owe $25,000 on your car loan.
Your insurer will pay your entire 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.
what is differential 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 usually purchase gap coverage through your auto loan lender or insurance company.
Differential insurance isn’t cheap, and you only need it when you owe more than the value of your car. It might be worth having gap insurance if you:
- paid little or no money for your car
- took a loan for more than a few years
- drive more than the average person, or
- I bought a car that loses value quickly.
For example, let’s say you total your sports car. The insurer says the ACV on 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.
what gap is not covered by insurance
Gap insurance only kicks in when your car is a total loss due to an accident or theft. gap insurance will generally not pay for expenses such as:
- car repairs when your car is not a total loss
- property damage you cause
- medical expenses
- a car rent, and
- carryover balances from previous loans.
Other types of car insurance, such as liability, collision, personal injury protection (PIP), cover accident-related losses when your car isn’t destroyed.
Can a lawsuit help cover the loan balance if I don’t have differential insurance?
Insurance companies are not required to pay the balance of your car loan. they are on the hook for the total fair market value of your car. the idea is that you will be able to replace your totaled car with the money from the total loss settlement. But things don’t always work out that way when you finance your car. So what do you do when you wreck your car and you’re upside down on your loan?
If you don’t have differential insurance to cover the difference between your total loss settlement and your loan balance, you can try negotiating 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 equal to your loan balance. If the insurer won’t budge, talk to a lawyer. An attorney can explain her options, including a possible civil lawsuit, and try to help her get a better settlement offer.
how do i get a new car after my old car is totaled?
Your options (and your budget) for buying a new car when your old car breaks down 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 greater than your loan balance. you can pay off your loan and use the rest of the settlement money to buy a new car.
worst case: Your total loss insurance settlement is less than your loan balance and you have no gap insurance. You are stuck with a wrecked 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 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 generally limited to newer cars and is often more expensive than gap insurance.
talk to a lawyer
If you have totaled your car in an accident, it might make sense to speak with an experienced car accident attorney. Sometimes insurance companies underestimate the fair market value of your car. An attorney can help you understand his options and will negotiate a better deal so he can pay off his car loan. Learn more about getting a lawyer’s help after a car accident.