What Happens If You Wreck A Financed Car Without Insurance When your financed vehicle is declared a “total loss” following an accident, it can be a confusing and stressful situation. Understanding the ins and outs of this process is crucial. In this article, we’ll unravel the mysteries of what happens when your financed car is totaled, including the role of gap insurance and your available options.
Defining a Totaled Car
A car is considered “totaled” when your insurance company determines that it’s not economically feasible to repair it after an accident. Each state sets specific thresholds for when an insurer must declare a car as a total loss. These thresholds are based on factors like repair costs as a percentage of the car’s Actual Cash Value (ACV).
For example, if you’re involved in an accident, and the estimated repair cost reaches or exceeds 75% of your car’s ACV, it’s likely that your insurance company will deem the vehicle a total loss. However, the threshold percentage varies by state, with some requiring as high as 100% or as low as 50%.
In states without specific thresholds, insurance companies evaluate repair costs versus ACV to determine whether a car is a total loss.
Keeping Your Totaled Car
If you have a sentimental attachment to your vehicle or believe you can repair it, you can choose to keep your totaled car. However, there are important considerations:
- The insurance company will deduct the salvage value of the car (what it could have received from a junkyard) from your settlement.
- The “total loss” designation will become part of your car’s history, potentially affecting future registration, insurance, and resale.
Insurance for a Totaled Car
If your car is declared totaled, you generally won’t need to continue making car insurance payments, as the car is no longer drivable. However, if you decide to keep and repair the totaled car, you’ll likely need to obtain a rebuilt title from your state’s Department of Motor Vehicles. Finding insurance for a vehicle with a rebuilt title can be challenging, as some insurers may not cover them, while others might offer only liability coverage. With persistence, you may find a carrier willing to provide full coverage for rebuilt cars.
Owing Money on a Totaled Car
When your financed car is totaled in an accident, your options depend on factors such as your insurance coverage, your car’s ACV, and the outstanding balance on your car loan. Let’s explore the possible scenarios:
Scenario 1: You Have Insurance
Most lenders require borrowers to maintain car insurance. However, the insurance coverage your lender mandates may not fully protect you in the event of a total loss. Why? Because insurance companies base their payouts on your car’s ACV at the time of the accident, regardless of your loan balance. Since cars depreciate over time, your insurance settlement might fall significantly short of what you owe on your loan.
For instance, if your car’s ACV is determined to be $8,000, but you still owe $10,000 on your loan, your insurer will send a check for $8,000 to your lender, leaving you responsible for the remaining $2,000, even though your car is wrecked. This is where gap insurance becomes invaluable.
Scenario 2: You Don’t Have Insurance
Driving without insurance is illegal in most states and typically not possible when financing a vehicle. If your financed car is totaled in an accident, and you don’t have car insurance, you’ll need to continue making loan payments until the loan is paid off. You’ll also be responsible for all accident-related expenses, including medical bills and property damage, out of pocket. If the accident involves another driver or property, you may face lawsuits, lose your driver’s license, and incur hefty fines for driving without insurance.
Scenario 3: The Other Driver Is at Fault
In cases where another driver is responsible for the accident, you may be able to file a claim with that driver’s insurance company (assuming they are insured). This is known as a “third-party insurance claim.” Whether dealing with the other driver’s insurance or your own, the insurer will only pay the ACV for your totaled car.
Scenario 4: Gap Insurance
Gap insurance, short for “Guaranteed Auto Protection,” bridges the gap between your car’s ACV and your outstanding loan balance. It can typically be obtained through your car loan lender or insurance company. Gap insurance isn’t always necessary but can be extremely valuable in certain situations, including if you:
- Made a small or no down payment on your car.
- Took out a long-term loan.
- Drive more than average.
- Purchased a vehicle with rapid depreciation.
For example, if your car is totaled, and the ACV is $25,000, but you still owe $35,000 on your loan, gap insurance will cover the $10,000 difference between your loan balance and the insurance settlement.
What Gap Insurance Doesn’t Cover
Gap insurance is specific to total loss situations resulting from accidents or theft. It typically doesn’t cover expenses like car repairs when the car isn’t totaled, property damage you cause, medical expenses, rental cars, or carry-over balances from previous loans. Other types of car insurance, such as liability, collision, or personal injury protection, handle losses when your car isn’t declared a total loss.
Getting a New Car After Your Old One Is Totaled
Your options for purchasing a new car when your old one is totaled depend on factors like your insurance coverage, your car’s value, and your loan balance:
- Best case scenario: If your total loss insurance settlement exceeds your loan balance, you can pay off the loan and use the remaining funds to shop for a new car.
- Worst case scenario: If your total loss insurance settlement falls short of your loan balance, and you lack gap insurance, you’re left with a totaled car you can’t drive and a car payment until the loan is paid off. In this situation, you might use your savings or explore loan consolidation options with your lender.
- Some insurers offer “new car replacement” insurance, which pays for a car of the same make and model if your car is totaled. However, this coverage is generally limited to newer cars and is often more expensive than gap insurance.
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Consider Consulting an Attorney
If you’ve experienced a total loss due to an accident, and you believe your insurance company undervalued your car, consulting an experienced car accident attorney can be beneficial. Insurance companies sometimes underestimate a car’s fair market value, and an attorney can help you understand your options and negotiate for a fairer settlement to resolve your car loan.
Learn more about seeking legal assistance after a car accident. When you’re ready, you can connect with an attorney directly from this page at no cost.
Disclaimer: This article provides general information and should not be considered legal advice. Consult with an attorney for guidance tailored to your specific situation.