Few situations feel as overwhelming as learning your car was totalled while you’re still making your monthly loan payments. Learning about your financial obligations and next steps can be very confusing for many drivers.
Learning how to protect your financial interests and navigate these tough situations starts with learning about what happens when your vehicle is declared a total loss.
Understanding What “Totaled” Actually Means
When your car is totaled, that means that the insurance company has determined that the cost of repairs is more than a certain percentage of your car’s cash value. This can be anywhere from 70 to 80 percent, depending on your insurer’s policies.
How does the insurance company determine your car’s value? There is a lot that goes into play. They look at the vehicle’s age, overall condition and mileage. This can be a very frustrating situation for vehicle owners who owe more than their car’s current worth.
The Gap Between What You Owe and What You Receive
Most car owners find themselves “upside down” on their auto loans, which means that they owe way more than their vehicle’s actual value. This can happen during the first few years of ownership when the loan is still huge and depreciation is significant.
In the event your insurance on a totaled car does not cover your loan balance, you still must make loan payments, as you owe this balance to the lender. The lender will continue to expect payments, so you must continue to pay the loan.
Immediate Steps After Your Car Is Totaled
“Start with your insurance agency so you can get the claims process going as soon as possible. Be ready with the proper documentation, such as police reports, pictures of the damage, and any maintenance records that you have on the car,” reports the Insurance Agency of Illinois, a company that provides auto insurance in Illinois.
You should also tell your auto lender that your vehicle has been totaled. Most loan agreements state that the borrowers have to notify their lenders when something of that magnitude happens, and to avoid any issues with your loan, you should make sure that you have done this.
Ask your insurance company for an explanation of how it calculated your vehicle’s cash value. It is important to understand how they came to that valuation so you can challenge it if you feel their calculations and reasoning undervalued your vehicle.
Negotiating Your Insurance Settlement
Insurance companies look at how much similar cars sold for in your area to price your car, but they do not have to get it right, and it could just be a starting point. Check to see how much similar cars with the same mileage, condition, and features have sold for to help make your case when you negotiate.
If you feel like the valuation is too low, you have a case that you should be able to negotiate for, and you need to submit your case in a diligent and professional manner to be given the attention you deserve. Providing recent documentation of how you took care of the car, such as maintenance or upgrades, as well as its exceptional condition for its age, can help justify a much higher settlement to better reflect your car’s value.
If a lot of money is on the line, and it seems like negotiations are at a standstill, it is worth your time to hire a professional appraiser. An independent professional appraisal is recognized by the insurance companies, and they can uncover flaws in the valuation that are favorable for you, but this will cost money.
Understanding Gap Insurance Coverage
When your car gets totaled, gap insurance will pay off the rest of your loan on that car. This is important to have for those who make low down payments on the car, or have long-term financing on cars that lose value quickly.
To see if you have gap insurance, look at your insurance documents or just ask your agent. Some dealerships will automatically include this type of insurance in their financing bundle, while others will make it an option during the purchase offer.
If you have gap insurance, fill out the paperwork as soon as you close out the claim with the first insurance company. The gap insurance company must have proof of the insurance payout and proof of your remaining loan balance in order to complete your claim.
Options When You Lack Gap Coverage
If you do not have gap insurance, you must pay the difference between the insurance payout and the loan payout on your own. Reach out to your lender to discuss your options for repayment, as some lenders may have forbearance programs or modified repayment plans for financially distressed borrowers.
If paying the full deficit to the lender presents financial hardship, consider negotiating an agreement with the lender. While lenders prefer to get the full payment due, some will settle for getting paid a lesser amount if they will not have to continue with payment collections, and they see you have limited ability to pay the full amount.
If you need financing to cover the gap, consider a personal loan or a credit card. Carefully consider the terms and the interest rates, as taking on additional debt must always be looked at as a last resort and only if it is reasonable to do so in the long run.
Protecting Yourself From Future Total Loss Situations
If you plan to finance a car and want the best rate possible, consider getting gap insurance for around $600 to help protect you while the car depreciates the most value at the beginning.
An easy way to stay in a better position value-wise for your car is to make a 20% down payment when you finance the car. That way, you will get your loan balance to not go over the value of the car during the time you will be paying for the loan.
Make sure you get a car that has good value retention when you sell it. Try to keep your loan at a 5-year term at most. If you do this, you have a lower chance of being in a bad position for loans and auto loans.
Moving Forward After Settlement
If you get a settlement on a vehicle, make sure you send a payment to your car finance company. After doing this once and the settlement is enough to pay off the loan on the vehicle, your car finance company will send you a letter indicating that the loan has been paid off and that you can keep the car.
Look before you leap the next time you buy a car. Think hard about how the purchase will impact you financially. Whether you need a new car immediately or if you can wait a while and save for a better down payment will depend on your current situation.
Remember that you will be financially responsible for the loan for as long as you have the car. You cannot ignore the loan balance and expect to have no consequences. Pay it off as soon as you can, and if you can not, try to work something out with the bank.
Conclusion
Outstanding loans and total loss on vehicles are complicated and create a unique set of problems for each situation. Understanding your insurance, knowing your rights (or lack of) during the claim process, and keeping the lines of communication open with your bank are things that will help you the most while finding a solution to your problem.
Taking confidence and preparation will help to avoid similar problems in the future. You can prevent financially risky situations by getting worthwhile insurance and putting a large down payment on a vehicle. I know that totaling a car is a risky situation to be in, but the right financial planning will help you navigate the problem and feel confident in your solution.
