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What if My Car is Totaled and I Owe Money on the Loan?

Serving Families Throughout Jacksonville
Totaled Cars

When you’re involved in a car accident, your life can come to an abrupt halt, especially if you have to spend time in the hospital and your car is so damaged that it has to be replaced.

When you’re without a vehicle, it can impact virtually every aspect of your life. Suddenly, daily activities like driving to and from work, running errands, and going to the doctor prove challenging. And if you have a family, it’s even worse. But having a totaled vehicle brings even more issues than those mentioned above.

If your car is totaled and you still owe on the loan, does the insurance company pay off the loan or are you liable for the balance?

In this article, we explain what it means for a vehicle to be totaled or a “total loss” and its impact on an auto loan.

Total Loss Vehicle Defined

When a vehicle is in an accident, it will usually fall into one of two categories:

  1. The vehicle will be repairable; or
  2. The vehicle will be so damaged the insurance companies deems it a “total loss.”

While each auto insurance company has its own criteria for a "total loss" vehicle, the standard is typically 80 percent, meaning the cost of the repairs will be 80 percent or more of what the vehicle is worth.

For example, if the fair market value for a vehicle is $20,000 and the repairs will be $16,000 (80 percent of the vehicle’s value), then the insurance company will likely deem the vehicle a total loss.

In cases of a total loss, the insurance company will not authorize repairs. Instead, the insurance company will write a check to the plaintiff (i.e. the person not liable for the accident) and it will include the lien holder’s name to ensure the bank or finance company is paid.

What to Do if Your Car Is Totaled and You Still Owe on It

Let’s say in the scenario above, the insurance company deemed your car a total loss, so it cut a check for $20,000, the fair market value of the vehicle. However, you owe $25,000 on the auto loan.

In this case, you are responsible for the remaining $5,000 on the auto loan even though you no longer have the vehicle. You are still responsible for making the monthly loan payments until the loan is paid off.

To avoid this situation, we recommend purchasing gap insurance. According to Nationwide Mutual Insurance Company:

"Gap insurance is an optional, add-on car insurance coverage that can help certain drivers cover the 'gap' between the amount they owe on their car and the car’s actual cash value (ACV) in the event of an accident. A car’s actual cash value is the car’s monetary value at the time of the accident, not the car’s original price."