If Your Car Is Totaled Do You Still Have to Make Payments?

When a car is declared “totaled” by an insurance company, it signifies that the cost to repair the vehicle after an incident exceeds a certain percentage of its actual cash value (ACV). Even if repairs are possible, a car might be deemed totaled if it would remain unsafe to drive. If your vehicle is totaled while you still have an outstanding loan, your financial obligation to the lender generally continues, as the loan agreement is a separate contract from the car’s physical condition or its insurance status.

Your Loan Obligation After a Total Loss

A car loan represents a contractual agreement between you and your lender. You are obligated to repay the borrowed amount, along with interest, over a predetermined period. This obligation remains in effect regardless of the physical state of the vehicle that secured the loan. The lender (lienholder) maintains a financial interest in the vehicle.

The lender expects to receive the full repayment of the loan, either through your regular scheduled payments or through an insurance settlement. Until the outstanding loan balance reaches zero, you are responsible for making all required monthly payments. Failure to do so can result in late fees, a negative impact on your credit score, or even repossession proceedings.

Understanding Your Insurance Settlement

When an insurance company determines your vehicle is a total loss, they calculate a settlement amount based on its Actual Cash Value (ACV). ACV represents the car’s market value just before the incident, accounting for factors like depreciation, mileage, condition, and recent sales of comparable vehicles.

The insurance payout for a totaled vehicle with an outstanding loan is typically issued as a check made out to both you and your lender. This joint payee arrangement ensures the lienholder’s financial interest is protected, requiring their endorsement before funds can be disbursed. Once the settlement is finalized, the insurance company usually takes possession of the totaled vehicle, often sending it to a salvage yard.

Navigating the Loan Payoff and Remaining Balance

The insurance settlement’s impact on your loan depends on how the Actual Cash Value compares to your outstanding balance. If the insurance payout, after any applicable deductible, is equal to or greater than the amount you owe on your loan, the lender will receive their payoff directly from the insurance company. Any remaining surplus funds will then be paid to you. This scenario means your loan obligation is fully satisfied, and you receive any remaining equity.

A more frequent situation arises when the insurance payout is less than your outstanding loan balance, creating a “gap.” This financial shortfall occurs because vehicles depreciate quickly, often faster than the loan balance decreases. In such cases, you remain personally responsible for paying the difference between the insurance settlement and the full loan amount.

To mitigate this risk, many car owners consider Guaranteed Asset Protection (GAP) insurance. This optional coverage is designed to cover the difference between your vehicle’s ACV payout and your outstanding loan balance if your car is totaled or stolen. If you have gap insurance, it typically pays this shortfall directly to your lender, preventing you from owing money on a car you no longer possess. Without gap insurance, you must pay this remaining balance out of pocket.

Steps to Take After Your Car is Totaled

After your car is declared a total loss, promptly reporting the incident to your insurance company is an important first step to initiate the claims process. Provide details, including any accident reports. Simultaneously, contact your loan provider to inform them about the total loss and the ongoing insurance claim.

Carefully review the insurance company’s valuation of your vehicle, which is based on its Actual Cash Value (ACV). You have the right to dispute the settlement offer if you believe it does not reflect the fair market value of your car. Gathering your own documentation, such as maintenance records or comparable sales data, can support your negotiation. Once a settlement is agreed upon, you will need to sign the vehicle’s title over to the insurance company.

After the settlement is complete and the insurer takes possession of the vehicle, it is important to contact your state’s Department of Motor Vehicles (DMV) to cancel the vehicle’s registration. You should also remove and return your license plates, if required by your state, to avoid potential fees or liabilities. Continue making your regular loan payments until your lender confirms the loan has been fully satisfied.