What Happens If You Total a Financed Car?

Being in a car accident in a car you own outright is bad enough. When you still owe money on the car, it adds insult to injury. What happens now? How will insurance payments affect your car loan, and what do you do with a vehicle you cannot drive?

This is an incredibly stressful situation, and with more and more Tennessee residents financing their vehicles, it is increasingly common. Learn more about your options by calling Rocky McElhaney Law Firm today.

What does “totaled” mean?

We have all heard about someone’s vehicle being “totaled” after a crash, but what does it actually mean? Under Tennessee law, a vehicle is typically considered a salvage vehicle when the cost to repair it equals or exceeds its fair market value, or when an insurer declares it a total loss. Once a car has suffered this level of damage, it may be classified as a salvage vehicle and is essentially “totaled” for titling purposes.

If your own insurer declares a total loss, it generally pays your car’s actual cash value (minus your deductible). If there is a lien, payment is typically made to you and your lienholder (loss payee). It is important to note that “a vehicle’s retail value” does not necessarily mean what you paid for it. A vehicle may be worth $40,000 when you purchase it, but if you are in an accident five years and 75,000 miles later, it is definitely worth considerably less. This is the issue when you are in an accident in a financed car – there is a chance that you owe more than the car is worth, especially since vehicles are depreciating assets.

What happens to your loan when your car is totaled

Insurers generally issue total-loss payment to you and your lienholder (or directly to the lienholder to satisfy the payoff), with any surplus paid to you. If the insurance payout covers the loan exactly, the lender releases the lien, your loan is paid off, and no one owes anything. If the payout is greater than the loan amount, the lender is paid off first, and the remaining funds are released to you.

The worst outcome is when the payout is less than what you owe on the vehicle. All of the money goes to the lender, but you still owe whatever is unpaid. This is what it means to be upside down on a loan. Luckily, gap insurance solves these issues in many cases.

Gap insurance and what it does

Tennessee does not require GAP coverage. Many lenders require a GAP waiver (not insurance under TN law) or, in some cases, an insurance GAP endorsement. Verify whether you have a GAP waiver through your lender or GAP coverage on your auto policy. Assume you owe $25,000 on a car loan. The insurance company determines that your vehicle was worth $18,000 prior to the accident, so they send your lender an $18,000 check. Instead of you having to pay the remaining $7,000, your insurance provider uses your gap insurance coverage to pay the remaining $7,000. In other words, depending on the terms of your GAP coverage, it may pay some or all of the remaining balance.

You are more likely to benefit from gap insurance if you financed most of the price of the vehicle, have a loan term of 60 months or greater, have a vehicle that depreciates quickly, or rolled over existing loan debt into your current loan.

Gap insurance is not required under Tennessee state law. However, many loan companies require gap insurance as a condition of financing your vehicle. They recognize that many people will not be able to come up with the thousands of dollars needed to square up a loan after an accident, especially since the borrower will still need to purchase another vehicle.

It is important to verify that your car insurance does include gap coverage before you purchase a vehicle. It could end up saving you thousands of dollars down the line.

What happens if you do not have gap insurance

Not all lenders require gap insurance, and not all insurance providers suggest it when a customer is purchasing a vehicle on a loan. This can leave you in a risky financial situation when your vehicle is totaled. You have no car to drive, you are not receiving anything from the insurance company, and you still owe your lender money.

At this point, you are responsible for the deficiency balance. Your lender may require immediate payment, but some offer short-term repayment plans. If you do not pay the remaining debt, they will likely be more aggressive in their collection attempts. They may send the debt to collections, which can result in a lawsuit against you and a damaged credit score.

What to do if your payout does not cover your loan balance

You have a few options if the insurance company’s offered payout does not cover your loan balance. Note that some of these options are no longer available once you accept a payout, so it is important to discuss your options with a car accident attorney ahead of time.

First, you can pay the remaining balance out of pocket. This is the most financially painful option, but it does clear the loan and protect your credit.

If that is not an option, you may want to ask your lender about negotiating a reduced lump-sum payment or allowing payments over time. The success of this method varies by lender.

You may also roll over what you owe into a new car loan if you plan on purchasing a new vehicle. Note that this does increase your car payment, and you risk running into the same situation if you are in another accident.

Finally, you can challenge the insurance valuation. If their proposed value of your vehicle is drastically lower than you expected, they may have lowballed you. You can request a reevaluation or provide evidence of comparable vehicles that are worth more.

Protect your legal rights with Rocky McElhaney Law Firm

If you have been involved in a car accident and you are not sure who is at fault, you could be owed compensation. Let us discuss your next steps now. Call us today or send us a message online to get started.