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? 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.

By , J.D. | Updated by Stacy Barrett, Attorney

Americans had $1.3 trillion in auto debt in 2019, according to a study by the consumer credit reporting company Experian. If you are one of the millions of people with a financed car, you might be wondering what happens to your loan if you are in a serious car accident and your car is deemed a "total loss."

Here is what you need to know:

  • Insurers pay owners the actual cash value (ACV) for a totaled car.
  • An insurance adjuster "totals" a car when the adjuster decides that the cost of fixing the car is more than the car's ACV.
  • Your car's ACV might be more or less than what you still owe on your car loan. You have to pay the balance of your loan no matter what—even if your car is totaled.
  • You can protect yourself from this financial risk with Guaranteed Auto Protection (gap) insurance, which covers the difference between your car's ACV and the amount you owe on your loan.

What Is a Total Loss Car?

A total loss car is a car that an insurance company decides is not worth the cost of fixing. Most states set a threshold for when an insurer must "total" a car. For example, a state might say an insurer has to total a car when the cost to repair it is more than 75% of the car's ACV. The percentage varies from state to state. You can typically find your state's total loss formula in the vehicle code. In states that don't use a total loss formula, insurers typically weigh the cost to repair and salvage a car against the car's ACV.

For example, let's say you lose control of your car on black ice and hit a tree. The front end of your car is crumpled. Your mechanic says it will cost $16,500 to fix. Your insurer says your car's ACV is $20,000. If the total loss threshold in your state is 75%, your insurer will total your car because it'll cost more than $15,000 to fix (75% of $20,000).

Calculating Your Car's ACV

Your car's ACV is an important piece of the total loss equation. ACV is another way of saying fair market value, or how much your car is worth today. The ACV of your car is based on the make, model, and model year of the car. Most insurance companies hire vendors to calculate a car's ACV.

Disputing an Insurance Company Over a Totaled Car

If you disagree with the insurance company's estimate of your car's ACV, you may negotiate with them for a higher payout using resources like Kelley Blue Book or other sites. You might also talk to the insurer about things like:

  • your car's mechanical condition
  • the body condition of your car
  • mileage, and
  • trim package.

You can use maintenance records, pre-accident photos, and other evidence to support your position that your car's ACV is higher than the insurer's estimate. If you still can't come to an agreement about the ACV, you can hire a private appraiser, but you'll pay out of pocket for it.

You can also dispute the insurer's vehicle repair estimate. You should get your own estimate for repairs. You can negotiate over the quality of the repair shop and the scope of the work covered by the estimates.

Can I Keep a Totaled Car?

You can keep a totaled car, but it will cost you. Your insurer will pay you the ACV of the car minus the car's salvage price.

Before you decide to keep a totaled car, consider the true cost to repair it, whether you'll be able to drive it safely, and whether you'll be able to register and insure the car. Your car will be issued a salvaged title by your state's department of motor vehicles and you'll need to prove that it's been repaired to clear it up.

What Happens When You Owe Money on a Totaled Car?

When you've been in a serious accident, your first concern is probably for your safety and the safety of others involved in the accident. But concern about your car loan is also top of mind. When you total a financed car, your options depend on your insurance coverage, your car's ACV, and how much you owe on your car loan.

If You Have Insurance

The good news is that if you have a car loan you probably have some amount of car insurance. Most lenders require you to get car insurance when you finance a car.

The bad news is that the insurance coverage your lender requires might not be enough to cover your loan when your car is totaled. Cars depreciate (lose value over time) quickly, so your car's ACV might be thousands of dollars less than your loan at the time of the accident.

If You Don't Have Insurance

Nearly all states require drivers and owners of cars to have insurance and lenders do too. But if you are in the unfortunate position of totaling your financed car without insurance, you'll have to continue to make car loan payments until the loan is paid off. If the accident was your fault, you'll have to pay for your accident-related losses out of pocket. If the accident involves other people who suffer injuries or property damage, you may be sued.

If Another Driver Is at Fault for the Accident

In most states, the person who was at fault for an accident pays for all accident-related losses.

If your car is totaled because of another driver's negligence (carelessness), you can file a claim with that driver's insurer. Whether you're dealing with your own insurance company or someone else's, insurers will pay you the ACV for a totaled car, no matter how much you owe on a car loan.

If the person who totaled your car is underinsured or uninsured, you can rely on your uninsured motorist (UMI) coverage (if you have any) or sue that person in civil court.

(About a dozen or so no-fault states have a different system.)

What If Insurance Doesn't Cover the Full Car Loan Balance?

Insurers don't care about your loan balance. They only pay out the ACV of a car at the time of the accident. For example, let's assume a truck driver rear-ends you and totals your car. The truck driver is clearly at fault for the accident. His insurer decides that the ACV of your car is $25,000. The problem is that you still owe $35,000 on your car loan.

The terms of your loan require that insurance settlements you receive for the car go to your lender first. In this case, the $25,000 check from the truck driver's insurer will go to your lender and you'll have to pay the remaining $10,000 on your loan. Gap insurance can help cover the difference between your car's ACV and what you owe on your loan.

What Is Gap Insurance?

Gap insurance is what sounds like—insurance that covers the "gap" between your financed car's ACV and the amount you owe on your loan. In other words, gap insurance pays the difference between what you collect from other types of car insurance coverage (like liability or collision) and your loan balance when your car is totaled.

Gap coverage is available in most states. You can purchase gap insurance through your car insurance company, car dealership, or lender.

You should consider purchasing gap insurance in the following situations:

  • you financed all or nearly all the price of the car
  • you took out a loan with an extended term, or
  • you bought a car that quickly depreciates in value (like many electric or luxury cars).

Gap insurance is worth buying if you owe significantly more on your car loan than the car is worth. For example, let's say you finance a car for $45,000. You still owe $32,000 on your loan, but the car is worth $25,000 when you total it. In this case, gap insurance is worth the cost to cover the $7,000 gap. But if you owe $15,000 and your car's ACV is $17,000, there is no gap to cover and you don't need the insurance.

Learn more about when you might need gap insurance.

Can a Lawsuit Help Cover the Loan Balance?

An insurance company will only pay for a totaled car's ACV up to policy limits. In most states, if you were at fault for the accident, you can file a collision claim with your insurer. If another person was at fault, you can file a liability claim with that person's insurer. Any insurance payment will go to your car loan lender first. You are responsible for paying the balance left on the loan, if any. You can pay the balance out of pocket or by filing a gap insurance claim, if you have gap coverage.

Your options are limited if you don't have gap insurance and the total loss settlement doesn't cover your loan balance. Filing a lawsuit typically won't change the fact that insurance companies will only pay out the current ACV for a totaled car, not the amount you still owe on your car loan.

But you can try to negotiate with the insurance adjuster to have them increase the estimate of your car's ACV. You can use online tools to figure out your car's value or get an estimate from a qualified mechanic or appraiser. If your negotiations stall, you can talk to a lawyer. A lawyer can advocate for you with the insurance company and talk to you about your options.

You might also want to talk to your lender about a new repayment plan.

How Do I Get a New Car After My Old Car is Totaled?

If an insurance adjuster totals your car, you'll probably need a new one. If your total loss insurance settlement exceeds your loan balance, you can use the money toward the purchase of a new car.

If your car's ACV is less than your total loss insurance settlement, you can file a claim with your gap insurance to cover the difference or continue to make payments until the loan is paid off. If you have an outstanding car loan, it can be difficult to get approved for a new car loan, but 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 brand-new car of the same make and model, minus the deductible, if your car is totaled. New-car replacement insurance typically applies only to newer cars and only if you buy collision and comprehensive insurance. New-car replacement coverage is typically more expensive than gap insurance.

Talk to a Car Accident Lawyer

If you've totaled your car in an accident, you might be able to handle the car insurance claim process on your own. But 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 negotiate for a better settlement so you can pay off your car loan.

Learn more about how a car accident lawyer can help with your case. You can also connect with a lawyer directly from this page for free.

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