What to do when your car is totaled and you still owe money

If your car is stolen or totaled in an accident or other covered disaster, your insurer will repay the lender – not you – for the car's current market value. But if the amount from your insurance company is less than what you owe on the loan, you will have to cover the remaining balance.

Here are the steps you can take if you find yourself in a situation where your car is totaled but you still owe money: 

Check to see if you have gap insurance

If you have a loan or lease agreement, your financial institution probably will require that you purchase a gap insurance policy. Not all car insurance companies offer gap insurance. You can also purchase gap insurance from some car dealers and lenders. 

"An alternative to gap coverage [is] having an endorsement for new vehicle replacement(usually needs to be brand new current model year depending on company)," says Pope.

File an insurance claim

Whether or not you have gap insurance, you will need to file a collision or comprehensive claimAn insurance claim is a request you make to your insurance company for coverage after your car is damaged or you have an accident. You can file a claim online, by phone, or in writing., whichever of those two is appropriate given the situation. 

Wait for your insurer’s decision

Once your claim has been reviewed and accepted, your insurer will agree to a payout in the amount of your car’s actual cash valueActual Cash Value (ACV) is the current market value of your car, considering depreciation. It's the amount your insurance will pay if your car is totaled or stolen.. The balance of your car loan could exceed this amount, leaving you responsible for the gap between the car’s actual cash value and the balance of your car loan. 

Pay off the remainder of the car loan

If you do not have gap insurance and there is a difference between the car’s actual cash value and how much you owe on the car loan, you will need to keep making payments until the loan is paid off.

What does it mean when your car is totaled?

If your car has been declared a total loss or totaled, it means the insurance company has determined that the damages to repair the vehicle would cost more than the vehicle is worth. That generally means the damage exceeds 65% to 70% of the vehicle's current market value.

Instead of paying for repairs, the insurance company will pay your lender the vehicle's actual cash value (ACV) after you've paid your deductibleThe deductible is the amount you pay out of pocket for a covered loss when you file a claim.. That is the vehicle's fair market value the instant before it was damaged in the accident and includes depreciationDepreciation is the decrease in your car's value over time due to wear and tear, age and mileage. Depreciation is used to determine the actual cash value of a vehicle in the event of a total loss.. Actual cash value is not what it will cost you to replace that same vehicle today; that is called replacement value.

Auto insurance providers never pay more than the vehicle's value when it is deemed a total loss. (See "Understand your options for a totaled car.")

Your collision deductible will be deducted from the actual cash value. Say you owe $20,000 and your vehicle is worth $15,000 at the time of the accident, and you have a $1,000 deductible. Your car insurance company would pay out $14,000 for your totaled vehicle.

The money wouldn't come directly to you because your car is financed. Instead, it would go straight to the bank. Or the check would be made out to you and your lender for you to sign and send to your bank.

How much will insurance pay for my totaled car?

The amount your insurance pays for a totaled car depends on the vehicle. The insurance company usually pays the car's actual cash value (ACV) before the loss minus depreciation, including wear and tear, past accidents, and mileage when a vehicle is totaled.

How can you avoid owing money on a totaled car?

The best way to avoid paying out of pocket when your car is totaled is to make sure you aren't upside down on the car. That means making sure you don't owe more on the car than it's worth.

There are two ways to avoid being upside down on a car:

  • Put down a big down payment. The larger your down payment, the less you will have to finance, and the lower the risk of being upside down.
  • Choose a shorter finance term. The longer the period over which you stretch your payments, the more you'll pay in interest and the slower you'll pay down the balance. That increases the risk of being upside down.

According to Edmonds, a car buying resource, the average car loan length has crept up in recent years to 72 months. Some drivers are even taking out 84-month loans. Longer loan lengths mean the car will likely depreciate faster than you're paying off your loan. And if the car is totaled while you still owe, it might not be worth enough to pay off the balance.

Cars do depreciate fast. If you can't put down a big down payment or have to take a longer term to make the loan payments affordable, consider buying gap insurance to protect yourself.

Can you keep your car if it's totaled?

If an insurer declares a vehicle totaled, many states require the car's title to be changed to a salvage title. That means you can't register for plates until you make repairs to fix the damage. If the repairs are completed, you can apply for a new title.

Often, a damaged car is auctioned off. The auto insurance company keeps the sales going. However, if you want to keep the car and your state allows it, the insurance company will request bids from salvage buyers to set a fair market value. They will then deduct that amount from your settlement.

This amount varies by state. If you decide you want to keep the car and perform the needed repairs, you'll want to talk to your insurance adjuster to see whether it's worth it.

A word of warning: Your insurer may not sell you comprehensive and collision coverage on the rebuilt car. Why? Because an insurer might not know how to estimate the value of the previously totaled car. You'll want to keep that in mind if you're considering keeping your totaled vehicle.

Car insurance doesn't always pay off your totaled car

Unfortunately, even if you have gap insurance to cover the rest of your loan amount, you won't get money to put toward a replacement car.

To have money from your insurance claim to put down on a replacement car, you would need to owe less than your loan amount. In that case, you would receive whatever money remains after the lender has been paid off. Or, if you owned the car outright, all of the money would come to you to put toward a new car. In the latter case, you probably would not have gap insurance.

But your insurance company isn't obligated to buy you another car just to pay you the pre-accident value of your old one.

Consider a gap policy essential if you can't put a hefty down payment toward the new car.

And don't forget to shop around. When you look for a replacement vehicle, compare car insurance quotes with multiple auto insurance providers to find who will offer you the best rates. You could save hundreds or more by shopping around and finding the insurer that doesn't rate as severely for an accident on your record.

What happens if you total a financed car with full coverage? 

If you total a financed car with full coverage, your insurance company will send a payment to your lender for the vehicle's actual cash value, minus any deductible.

If the other driver was responsible for the accident, it is possible that the driver’s insurance company will be responsible for the payment. If this happens, you might not even owe a deductible. 

Remember that the actual cash value of a car is how much the car was worth on the day the accident occurred, not the price you paid for the car. If you have not purchased gap insurance, you will be financially responsible for any separation between what the car is worth and what you owe on the car loan. 

Do I still have to make payments on a totaled car with gap insurance?

If your car is declared a total loss, it does not relieve you of the obligation to pay off the car loan. Without gap insurance, you would need to make the remaining payments until you have paid off the car loan. 

However, if you did purchase gap insurance, the insurer will pay off the amount remaining on the loan. You will not have to pay off the remainder of the loan out of pocket. 

Auto insurance FAQs

If my car is totaled will insurance pay it off??

No. Most insurance policies use the actual cash value (ACV) method to determine the amount they will pay on the totaled vehicle. If you owe more on the loan than the car's actual cash value, you will still owe the remaining balance to your lender. Only gap insurance helps to pay off your loan.

What happens if my car is totaled and I only have liability insurance?

Liability insurance doesn't cover any damage to your car, including a total loss. Unless the other driver is at fault and their insurance is footing the bill, you will have no coverage for your car.

What happens if you have gap insurance and your car is totaled?

If you have gap insurance and your car is totaled, you will file a claim for the actual cash value of your car against your comprehensive or collision coverage, and also file a claim against your gap insurance for the difference between the actual cash value of the car and what you owe on your loan.

How does a total loss work on a financed vehicle?

If you financed a vehicle and your insurance company declared it a total loss, you are still responsible for paying the remaining loan amount. Usually, the insurance company pays your lender first and gives you the rest of the reimbursement money if there's any money left.

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