Your Car Was Totaled But You Owe Money on the Auto Loan

Your Car Was Totaled But You Owe Money on the Auto Loan

It’s no secret: Texas is a BIG place. As the biggest state in the United States, Texans rely on their vehicles heavily to get around. When someone else causes a car accident that totals your vehicle, it’s a major disruption and if you don’t have a second car laying around, it can quickly become inconvenient to be without a car.

To make your situation worse, if you financed your auto loan as most people do and you still owe money on the loan, you could be facing some major financial headaches if you didn’t purchase gap coverage. In this article, we discuss the financial repercussions of still owing money on an auto loan after a car is deemed a “total loss” by the insurance company.

What Does ‘Total Loss’ Mean?

When an insurer deems a car to be a “total loss,” it means that the repairs will be too expensive. Usually, a car is a “total loss” when the repairs exceed 80% of the fair market value of the vehicle. For example, let’s say your car was worth $10,000 on the day of the crash but it will cost $9,000 to repair it. Since the repairs are 90% of the vehicle’s value, the insurance company will likely consider the car to be a total loss.

When a vehicle is deemed a total loss by an insurance company, the insurer cuts a check to the plaintiff for the fair market value of their vehicle. But what if the auto loan is more than what the car is worth? Unfortunately, insurers don’t necessarily cut checks that are equal to the driver’s loan balance because that’s not how it works.

Instead, insurance companies will only write the plaintiff a check for the fair market of their vehicle, which is often less than the balance on the auto loan.

The Insurance Company’s Check

When there is a loan on a totaled vehicle, the insurance company issues a check with both the plaintiff’s name on it and the lienholder to ensure the money goes toward paying off the auto loan. But what if the check doesn’t pay off the loan?

If the check for your total loss vehicle is insufficient to pay off your auto loan, you are still legally obligated to continue making your loan payments until the loan has been paid off in full. Even if your vehicle is deemed a total loss, it does not change the terms of your loan.

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