What Happens If You Crash a Financed Car With Insurance?
Understand the financial and insurance landscape after crashing a financed car. Navigate loan obligations and coverage.
A car crash can be unsettling. When the vehicle is financed, the situation becomes complex. Understanding your car insurance and outstanding loan is essential. This article clarifies the financial and insurance processes for a financed vehicle crash.
Understanding Your Car Insurance Coverage
When financing a vehicle, lenders require specific insurance coverages to protect their financial interest. Collision coverage is standard, paying for repairs or replacement if your vehicle is damaged in an accident, regardless of fault. This coverage includes a deductible, the amount you pay out-of-pocket before your insurance policy covers costs.
Comprehensive coverage is another common requirement for financed cars, protecting against damages not from a collision. This includes theft, vandalism, fire, natural disasters, or striking an animal. Both collision and comprehensive coverages protect the lender’s investment.
Beyond these, gap insurance offers additional protection for financed vehicles. This optional coverage addresses the financial “gap” if your car is a total loss and you owe more than its actual cash value (ACV). ACV represents the car’s market worth at the time of loss, factoring in depreciation.
Filing Your Insurance Claim
Initiating an insurance claim promptly after a car crash is a first step. You should notify your insurance provider as soon as possible, whether by phone, online, or mobile app. When reporting, provide specific details: location, date, time, information about other parties, and any police reports. Taking photographs of damage and the scene is beneficial.
Upon receiving your claim, the insurance company assigns an adjuster. The adjuster investigates, assesses damage, and determines policy coverage. They may arrange for an inspection, review police reports, and collect statements. The adjuster works with you to determine repair estimates or if the vehicle is a total loss.
Communication occurs between the insurer, repair shop, and lienholder for financed vehicles. Your insurance company may require documents like proof of claim forms and a police report copy. Adjusters contact claimants within one to three days. Keep thorough records of all communications and documents.
Financial Impact on Your Car Loan
When a financed car is in an accident and an insurance payout is issued, the lienholder (the bank or financial institution) has a primary financial interest. The insurance company issues payment directly to the lienholder first.
In a repair scenario, the insurance payout covers repair costs. Your loan obligations continue, with regular monthly payments due. Your policy’s deductible applies to repair costs; you pay this amount directly to the repair shop before insurance coverage takes effect. The insurance payout, minus your deductible, goes to the repair facility.
If the car is a total loss, the insurance company determines its actual cash value (ACV) and issues a payout based on this. This ACV payout is sent to the lienholder to reduce or pay off the outstanding loan balance. If the ACV payout is equal to or greater than your remaining loan balance, the lender’s claim is satisfied, and any leftover funds are disbursed to you. It is common for the ACV payout to be less than the outstanding loan balance, creating a financial deficit.
Handling a Total Loss and Loan Obligations
A vehicle is declared a total loss when repair costs exceed a percentage of its actual cash value (ACV), or if damage is too extensive for safe repair. Insurance companies use formulas and state-specific thresholds, comparing repair estimates to the car’s pre-accident market value. Once declared a total loss, the insurance payout is based on the vehicle’s ACV at the time of the incident.
This ACV payout goes to your lienholder to settle the outstanding loan. If the ACV payout is less than your remaining loan balance, a “gap” exists. You, the borrower, are responsible for paying this difference to the lender. This means you could be making payments on a car you no longer possess.
Gap insurance covers this financial deficit, paying the difference between the ACV payout and your outstanding loan balance. This coverage prevents you from being burdened with a loan for a totaled vehicle you can no longer drive. Without gap insurance, you pay the remaining loan balance out of pocket, potentially through savings or by negotiating a payment plan with the lender.
Continue making loan payments to avoid negative credit impacts while the claim is processed. Consider options for acquiring a new vehicle, which may involve new financing.