An auto insurance expert fields a question from a consumer who wants to know if their insurance policy will pay off their car loan if their car is totaled out.
Find out what happens with your car loan if your car is declared a total loss.
I totaled my car last week. I know that the car value is about half of what I still owe. Will the insurance company pay off my car or just the car's current value? Will I get something to put towards a replacement car?
Dale, Dallas, Texas
Unfortunately, it sounds as if you're going to be stuck in a bad position because your car insurance policy will only pay for your car's current actual cash value (referred to as the ACV by the insurance industry).
I often hear from car owners who were only able to put down a low down payment and have a long loan period. Those factors, plus a car that depreciates rapidly in value and they end up like you -- upside-down on the loan and owe more than the worth of the car, which means trouble if the car is in an accident and totaled out.
An auto insurance company will only pay up to the ACV of your vehicle. There is nothing you can do to get paid more than the current worth of your vehicle, since in the insurance world an ACV payout settlement makes you whole.
So, if your car's value is $3,000 and you still owe $6,000, then your car insurance company will only pay $3,000 and now you're left to pay to your lien holder the remaining $3,000 that is still due on your car loan, unless you have gap insurance.
When you owe more than the value of your car it's recommended that you obtain gap insurance. A gap insurance policy pays the difference between the ACV paid out by the auto insurance provider for your totaled out car and the balance that remains on your car loan or lease.
Gap insurance can normally be purchased for the first 12-month period after you buy a new or used car, and cannot be bought after you've been in a total loss accident. Thus, it's too late to buy it now, but if you happen to have bought this coverage when you obtained your vehicle, then it should pay the "gap" between what your car's ACV is and what you still owe on your loan. Without it, you are responsible for paying off this amount.
Neither your primary car insurance company nor gap insurance will give you money to put towards a replacement vehicle. The only way to come out of a total loss situation with money for a new car is if you owed less than your car loan amount (or had no loan at on the totaled car), then the money being paid out for your car's ACV would be what you'd use to buy yourself a replacement automobile.
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