If you’re in an automobile accident that’s covered by your insurance, the process is pretty straightforward. You submit a claim for the accident to your insurance, they assess whether the damage is covered and how much it will cost to repair, then they pay a mechanic to have the vehicle repaired (minus whatever your deductible happens to be.)
But what happens if your vehicle is written off as a ‘total loss’ after an accident, and what exactly does that mean? In this guide, we’ll explore how to calculate a total loss vehicle and what it means for you after an accident.
What is a Total Loss?
After your vehicle is involved in an accident and you submit an insurance claim, your insurance provider assesses the total cost of the repairs required to return your vehicle to its condition before the accident. Meanwhile, your vehicle also has an assessed actual cash value— how much your vehicle is worth right now (damage from the accident not included), taking into account its mileage, model, year, and overall wear and tear.
When the cost of fixing your car in an insurance claim is either more than the total value of your vehicle or more than a specific percentage of your vehicle’s actual cash value in some states (known as the total-loss threshold), the vehicle is written off as a total loss. This means that rather than pay for your vehicle to be repaired, your insurer will simply issue a payoff settlement to you in the amount of your vehicle’s current value minus your deductible.
If you still owe money on your vehicle in the case of an auto loan, this payoff amount will go toward paying off that loan. Anything leftover after your lender has been paid will go to you.
What Determines a Total Loss?
Your insurance company will determine your vehicle to be a total loss based on a number of factors, including the year, make, model, total mileage, wear and tear, and the damage that has occurred in the accident (in some cases).
Generally, a newer and well-taken-care-of vehicle will have a higher actual value and is less likely to be written off as a total loss except in the case of extreme damage. A lower-end vehicle or one that’s old, has a higher mileage count, and is riddled with wear and will often be written off as a loss even with minor damage after an accident. There’s no hard and fast way to determine whether your vehicle will be written off as a total loss other than the calculations made by your insurance company determining the cost to repair it versus its actual cash value.
How is a Total Loss Value Calculated?
In some places, insurance companies will only declare a vehicle a total loss if the cost to repair your vehicle is equal to or greater than its actual cash value. So if the estimate to repair your car is $8,000, but the vehicle is worth $7,999, the vehicle will be written off as a loss.
But in some states, the threshold for a total loss isn’t 1:1. For example, some states have an 80% rule— if the cost to repair a vehicle after a covered incident is more than 80% of the vehicle’s actual cash value, the vehicle will be written off as total loss and you (or your lender) will receive a payout.
What Causes the Total Loss to Be Less Than What You Owe on a Loan?
So, what happens if you’re in an accident, your vehicle is determined to be a total loss, and you receive a check— but the payoff is less than what you owe on your loan? This is a stressful but fairly common occurrence and happens when someone is in a total loss accident but they’re ‘upside down’ on their loan— they owe more than what the vehicle is worth. Remember, your insurance company will only pay the fair market value for your vehicle. They don’t take into account what you still owe, or whether you owe anything at all. Whatever you get paid, it goes to your lender first. If you owe more than your payoff, the loan will be paid down but not all the way paid off. That means you don’t have a vehicle but still have loan payments leftover.
Here are some of the common factors that can lead to receiving a payoff that’s less than the balance of your loan.
Car Depreciation
Vehicles lose value over time in a process known as depreciation. Wear and tear, damage, and mileage all contribute to this depreciation, but it’s also a simple matter of time. The average car depreciates around 20% during its first year and 40% in the four years after that. That means that after five years, your vehicle will likely be less than half the value of what you first paid for it.
The best way to avoid being underwater on a loan because of car depreciation? Opting for a shorter loan period and making a larger down payment when you purchase a vehicle. This will put you ahead of the depreciation curve and help you avoid being underwater on a loan in the event of a total loss.
Lack of Gap Insurance
Gap insurance is designed to avoid exactly the scenario we’ve described in this section. Gap insurance is a (usual optional) coverage that will cover the difference between what you owe on a vehicle and how much the vehicle is worth.
If you don’t have gap insurance in place, that means that you’re on the hook for the difference between your remaining loan amount and the vehicle’s value. This could be hundreds or even thousands of dollars in some cases.
Extended Warranties
You often have the option to purchase an extended warranty for your vehicle, and rather than paying for it up front it will be rolled into the loan for the vehicle. That means you’re paying for more than the value of your vehicle in your loan payments— another path that often leads to being underwater on your loan. NOTE: You might be eligible for a refund of part or all of your unused warranty in the event of a total loss. Contact the company you bought your warranty from for details about this.
Your Rolled Your Loan Into This One
Some auto dealers allow car buyers to roll their existing vehicle loan into a new loan, which brings negative equity into the new loan. For example, let’s say you still owe $5,000 on a previous auto loan and you decide to enter into a new loan to purchase a $20,000 vehicle. The dealership may offer to roll your remaining $5,000 into the new loan. This would almost certainly mean that you’re immediately underwater on the new loan, as you’re adding $5,000 on top of the value of the new vehicle to the loan.
What if Your Car is Totaled and You Still Owe on the Loan?
If your vehicle is totaled in an accident and you still owe on the loan, you have a couple of options. That said, no matter what happens you’ll always be responsible for the remainder of your loan, no matter whether your vehicle is completely destroyed, completely unusable, or at the bottom of the ocean. Here are a couple of paths forward to help you get out of this tricky situation.
Pay Off the Loan
If you can, the best way to get free of the remaining balance of your loan is to pay it off as quickly as possible. For some, this may mean a lump sum payment to get yourself free and clear. For others, it will simply mean continuing to make the minimum payments until the loan is paid. Whatever your approach, the faster you can pay down and pay off that loan, the better for your financial future and credit history.
Negotiate with Your Insurer
In some cases, you might be able to negotiate with your insurance company if you feel that they’ve assessed the value of your car to be lower than what you think it’s really worth. However, they won’t just take your word for it. You’ll have to provide evidence such as Blue Book value, local sellers selling similar vehicles, and other sources to make your case. If you can convincingly prove that the initial payoff offer was too low, your insurance company may pay the difference and leave you less underwater on your remaining vehicle loan.
In the future, try to avoid combining or ‘rolling’ auto loans together, as this is one of the fastest ways to end up underwater on your loan, which can lead to serious problems when it comes to having your vehicle written off in a total loss.
Can You Keep a Totaled Vehicle?
Every state has its own rules about whether you can keep a car after an insurance company has totaled it. In the states where you can keep it, you’ll need to deduct the ‘salvage value’ of the vehicle from the total amount of your payoff. The salvage value is how much your damaged vehicle could be sold for if it was simply sold for parts or as-is, damage and all. Then, at your convenience, you can repair the vehicle.
Just make sure you know your local regulations before proceeding with this course of action.
Conclusion
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