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

Your car has been deemed a total loss, but it's not paid off yet. What now?

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What could be worse than having your automobile totaled in an accident? How about owing more on the automobile than your insurance company is willing to pay? Unfortunately, after a car accident, many car owners find themselves left with a loan balance for a vehicle they can no longer use. This article explains how the vehicle valuation process works, and how you might be able to protect yourself from owing money on a totaled car.

Determining Your Car's Worth

Insurance companies pay what is commonly referred to as fair market value for automobiles that have been totaled in accidents. Simply put, the fair market value is the amount your automobile was worth before the accident, taking into consideration depreciation and mileage. The fair market value is then compared to the costs to actually repair the car. If the costs of repairing your car outweigh the vehicle’s fair market value, then the insurance company will consider the car a ”total loss” and will issue you a check for the fair market value.

For example, let’s say you get into a car accident, and two repair shops estimate that it will cost $3,500 to repair your vehicle. But the pre-accident Kelley Blue Book value of your car is $3,100, and the insurance company agrees with the repair estimates and the vehicle valuation. In that case, your car will be considered a total loss, and you’ll be issued a settlement check of $3,100 (less your deductible in some cases, if you’re using your own collision coverage). The insurance company won’t pay the full $3,500 to get your car fixed.   Get more information on Vehicle Damage and ‘Actual Cash Value’.

But if you’re still in repayment on a car loan, it’s possible that you actually owe more on the vehicle than its fair market value. In that case, you are responsible for the difference. So, what are your options?

Make Sure the Vehicle Value is Correct

It is important to note that most insurance companies are willing to negotiate the amount you’ll ultimately receive as compensation for the value of your totaled vehicle. So, do your own research to calculate the fair market value and costs of repair, keeping in mind the balance of your outstanding debt, and be prepared to offer a reasonable counteroffer when necessary. Make sure that the valuation includes all vehicle “extras” like air conditioning, performance packages, and custom equipment that isn’t removable. If you believe the insurance company is not being fair in determining the settlement amount, or you believe you are being given the runaround, you may want to consult an experienced attorney who can negotiate on your behalf. Learn more about Disputes Over the Value of ‘Totaled’ Vehicles.

Get Gap Insurance

This is more of a preventive measure than a post-accident solution, but when buying an automobile, if you finance 80% or more of the car's purchase price -- or if you roll past debt into the new car loan balance -- consider purchasing guaranteed auto protection insurance, also known as gap insurance. Gap insurance is insurance which will pay the difference, or "gap," between what the insurance company is willing to pay for your totaled car and what you actually owe the lienholder. Gap insurance may be purchased through your car dealership and added to your monthly payment, or it may be purchased independently from your car insurance company. 

What Should You Do?

If you have been in an automobile accident, immediately contact your insurance company and file a claim. This will allow the insurance company to begin determining the fair market value and costs of repair. Next, if you purchased gap insurance, contact your lender and have the lender file a claim with the gap insurance provider. After the insurance company processes the claim and a settlement amount is negotiated, a check will be issued to you and your lender for the fair market value of the automobile. Finally, the gap insurance company will issue a payment directly to the lender for any outstanding loan balance not covered by the initial insurance payment. 

If you did not purchase gap insurance and the fair market value paid by the insurance company is not sufficient to pay off the outstanding loan balance, then you must pay the difference out-of-pocket. If you are unable to pay the remaining balance in a lump sum payment, contact your lender and discuss available payment options.

If another driver is at fault for your car accident, you should be able to receive compensation for the difference between your vehicle’s cash value and what you actually owe on the car. You do this by filing a “third party” claim with the other driver’s insurance company. Learn more about Filing a Third-Party Claim for Vehicle Damage.

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