Getting in a car accident is always a hassle, but it’s even more inconvenient when an insurance adjuster deems your financed car a “total loss.” Not only are you out a ride, but you’re still responsible for paying off your car loan.
An insurer will only pay you (or your lender) the actual cash value (ACV) of your totaled car. Your car’s ACV might be more or less than your car loan balance at the time of the accident. Guaranteed asset protection insurance (gap coverage) can help cover the difference between your totaled car’s ACV and the amount you still owe on your loan.
What Is a Total Loss Vehicle?
An insurance adjuster says a car is a total loss (“totaled”) when it isn’t cost effective to fix it. The total loss analysis starts with a calculation of your car’s ACV. Actual cash value is another way of saying the fair market value of your car, or how much you could sell your car for today.
An adjuster’s actual cash value determination is based on many factors, including a car’s:
- make
- model
- model year
- mileage
- trim package
- accident history, and
- condition (poor, fair, good, excellent).
You can get an estimate of your car’s ACV using online tools like Kelley Blue Book. You can also look at what similar used cars are selling for in your area.
If the cost to repair your car is more than a certain percentage of its ACV, the insurer will declare your car a total loss and reimburse you for the actual cash value of the car. The percentage varies by state and insurer.
For example, if your car’s ACV on the day of your accident is $10,000 and your state’s total loss threshold is 70%, an insurer will total your car if it’ll cost $7,000 or more to fix it. If repairs cost less than $7,000, the insurer will likely reimburse you for the cost to repair it.
Insurers in states that don’t set a total loss threshold typically weigh the cost of repairs plus the scrap value of the car against the car’s ACV.
What Happens When You Total a Financed Car and Still Owe Money on Your Car Loan?
When you total a financed car, you are still responsible for paying off the balance of your car loan. You might be able to pay it off entirely with your insurance settlement—and maybe even have money left over to put toward a new car—or you might get stuck making payments on a loan for a totaled car. Your options often depend on who was at fault for the accident and your insurance coverage.
You Are at Fault for the Accident
Car accidents happen. And sometimes they happen because you are careless (negligent). When you are responsible for an accident, it can be costly—especially when you don’t have enough insurance. Learn more about what to do and not do after a car accident.
You have insurance: Two types of insurance protect your car, regardless of fault for an accident: collision and comprehensive. Collision pays for physical damage to your car that happens when you collide with another car or object. Comprehensive pays for damage caused by something other than a collision, like a hailstorm or fallen tree. If you are at fault for an accident you can rely on your own collision or comprehensive coverage for compensation. Your recovery will be limited to your car’s actual cash value minus your deductible (the amount you agree to pay for damages before the insurance company has to pay anything).
You don’t have insurance: If you are at fault for an accident and you don’t have insurance, you’ll have to pay off your car loan out of pocket. You’ll also be legally responsible (liable) for paying for any injuries and property damage you cause. Nearly all states require drivers and car owners to have insurance or other proof of financial responsibility, so you might also face fines and a driver’s license suspension.
You Are Not at Fault for the Accident
In most states, the person who is at fault for an accident pays for all accident-related losses. If your car is totaled in an accident that isn’t your fault, you can file a claim with the at-fault driver’s insurance company (and the car owner’s if the owner is different from the driver). Even in the dozen or so no-fault insurance states, you can pursue a claim against the at-fault driver for vehicle damage.
You have insurance: If the at-fault driver has adequate insurance, that driver’s liability coverage should pay out your car’s actual cash value But if that driver is underinsured or uninsured you’ll probably have to rely on your own collision coverage or uninsured motorist (UIM) coverage.
You don’t have insurance: You can typically make a claim against the at-fault driver’s liability insurance, but your recovery might be limited if you don't have insurance. Several states have "No Pay, No Play" laws that cap an uninsured driver's ability to recover accident-related losses, even when the other driver is at fault for the accident.
What If Your Insurance Settlement Doesn’t Pay Off Your Entire Car Loan?
If your financed car is totaled, an insurance company (yours or the at-fault driver’s) will pay your lender your car’s actual cash value. If the settlement doesn’t pay off your entire car loan, you are responsible for paying the balance, even though your car is totaled and you can’t drive it.
Car insurers aren’t required to pay off your car loan. They are obligated to pay out only your car’s fair market value. You can easily end up upside down on your car loan—owing more than your car is worth—because cars depreciate so quickly.
Gap insurance can help cover the difference between what your car is worth today and your car loan balance.
What Is Gap Insurance?
Gap insurance bridges the “gap” between the amount you owe on the car loan and your totaled car’s fair market value. Gap coverage kicks in when your total loss settlement check isn’t enough to cover your entire car loan.
Your current car insurance policy might include gap coverage. If not, you should think about whether you need it. You might benefit from gap coverage if you:
- took out a long-term car loan
- bought a car that loses value quickly
- put little or no money down, or
- financed more than the purchase price of the car to pay for taxes, service plans, and other extras.
For example, let’s say you took out a $50,000 loan on a brand new luxury car. You put little money down and agreed to a seven-year loan term. As soon as you drove the car off the lot, it lost value. A year later, you total your car in an accident. Your car’s actual cash value at the time of the accident is $45,000, but you still owe $48,000 on your loan. Gap insurance will cover the $3,000 difference between what you owe on your car and what an insurance company will pay you for it. If you don’t have gap coverage, you’ll have to pay the $3,000 difference out of pocket.
Gap insurance only kicks in when your car is totaled. It doesn’t pay for car repairs or other accident-related losses and expenses.
Can a Lawsuit Help Cover the Loan Balance?
A lawsuit won’t change the fact that an insurer will only pay out your car’s actual cash value, no matter how much you owe on your car loan. But you can negotiate for a better total loss settlement.
Make sure the insurance adjuster knows about all of your car’s features and provide mechanical records and photos of the condition of the body before the accident. If you just replaced the tires or did other major work, provide receipts to the adjuster.
Do your research on your car’s fair market value and prepare a counteroffer. The important amount is the retail value, not the trade-in value. Use online valuation tools and search used car websites. You might even want to hire your own appraiser.
If the insurance company won’t settle your claim, talk to a lawyer. A lawyer can try to negotiate for a better settlement so you can pay off your car loan. You might also talk to your lender to discuss a repayment plan.
How Do I Get a New Car After a Total Loss?
You’re probably eager to get a new car after your car is totaled. But if you owe money on the car, your total loss settlement check will go to your lender first to pay off the balance of your loan. You can use whatever is left toward the purchase of a new car.
If your settlement isn’t enough to cover your entire loan and you don’t have gap insurance, you’ll have to continue to make payments until the loan is paid off. You can buy a new car with your savings or try to get a new loan. Some lenders might be willing to consolidate what you owe into a new car loan.
Talk to a Car Accident Lawyer
Totaling a car is stressful. You might be able to handle the insurance claim process on your own, but you'll likely benefit from the help of a knowledgeable car accident lawyer. A lawyer can answer your questions, guide you through your options, and help you get fair compensation for your totaled car. Learn more about when it makes practical and financial sense to have a car accident attorney on your side. You can also connect with a lawyer directly from this page for free.