Do You Still Have to Make Payments on a Totaled Car?
A totaled car doesn't void your loan. Understand your financial responsibilities and how insurance impacts your remaining obligations after a total loss.
When a car is declared a total loss, it presents a complex situation for owners with outstanding loans. Many assume loan obligations disappear, but payments typically continue regardless of the vehicle’s condition. The car loan is a separate financial agreement. Understanding this distinction is crucial after a total loss.
Understanding Your Loan Obligation
An auto loan is a binding contract between the borrower and lender, obligating repayment over a specified period. Most car loans are secured, with the vehicle serving as collateral. If payments cease, the lender can repossess the vehicle to recover funds.
An insurance company declares a car “totaled,” but this does not void or alter the loan agreement or the borrower’s contractual obligation. The responsibility to repay the loan remains with the borrower, regardless of the car’s operational status or total loss declaration. Payments are still due as per the original agreement, even without a drivable vehicle.
The Role of Car Insurance
Car insurance helps mitigate the financial impact of a totaled vehicle. Collision and comprehensive coverages address damage to your vehicle. An insurer declares a car “totaled” when repair costs exceed a percentage of its Actual Cash Value (ACV). This “total loss threshold” typically ranges from 60% to 80% of the car’s pre-accident value.
ACV is the vehicle’s fair market value immediately before the incident, considering its age, mileage, condition, and comparable sales. Once totaled, the insurer issues a payout based on ACV, minus any deductible. This payout usually goes directly to the lender, who holds the lien. The insurance payout is based on the vehicle’s value, not the outstanding loan balance.
Addressing the Loan Balance After Insurance
A common financial challenge arises when the insurance payout, based on the car’s Actual Cash Value, does not fully cover the outstanding loan balance. This difference is known as a “loan gap.” Vehicle depreciation begins immediately, often leading to a situation where the amount owed on the loan exceeds the car’s market value.
To protect against this exposure, many owners purchase gap insurance. This specialized coverage pays the difference between the insurer’s ACV payout and the remaining loan balance. Without gap insurance, borrowers are legally obligated to pay any outstanding balance themselves after the insurance settlement. This means continuing payments on a vehicle they no longer possess.
Next Steps and Practical Considerations
After a car is totaled, prompt communication with your lender and insurance company is important. Contact your lender immediately to inform them of the total loss and inquire about procedures. Maintain regular loan payments until the insurance settlement is processed; failing to do so could negatively impact your credit rating.
Obtain an official payoff quote from your lender, specifying the exact amount to satisfy the loan. The insurance company will require documentation, including the vehicle’s title, to finalize the payout and take possession of the totaled car. If a loan gap exists without gap insurance, discuss repayment options with your lender, such as payment plans or refinancing the remaining amount.