Being in a wreck can be a huge inconvenience. You probably have to seek medical treatment. You may even need to stay in the hospital for several days, weeks, or months. You are likely to lose income and experience a lot of pain. Your entire quality of life may be affected. And, what if your car is totaled and you can’t drive it ever again? Now, that creates a whole other set of problems for you.
In car accidents, one of two things can happen: 1) the car can be damaged, but reparable, or 2) the car can be damaged beyond repair. In the latter example, insurance companies call these “total loss vehicles” because they’re not worth repairing or they’re impossible to repair. Usually, a vehicle is deemed a total loss when the cost of repairs exceeds 80% of the vehicle’s value.
When The Totaled Car Has a Loan Balance
It is very common for total loss vehicles to still have an auto loan against them. Why? Because, most people can’t afford to buy a brand-new car in cash so they finance them. Once a car is driven off the lot, it depreciates; therefore, it’s very easy for people to owe more on their cars than they’re worth. So, what if your car is totaled and you still owe money on the loan? Will the insurance company pay off the loan or, gulp, are you responsible for it even though you don’t have the car anymore?
For starters, insurance companies are in the habit of cutting checks for the fair market value of total loss vehicles, and such checks have the bank’s name on them so the bank gets paid first. If for example, a car’s total market value is $15,000, but the auto loan balance is $21,000, the car owner will be liable for the remaining $6,000 left on the auto loan.
If your car was totaled in an accident and the fair market value is less than what you owe on the vehicle, YOU will be liable for the remaining loan balance. To protect your credit, you will have to pay off the auto loan or continue making the scheduled payments. For this reason, we highly recommend that all drivers purchase gap insurance in case their car is totaled in a car accident.
To learn more about gap insurance and how it can protect you, we recommend reading the Bankrate article, “What is gap insurance and how much is it?”