Unfortunately, this payment isn’t always enough to cover the amount of money you owe on your car loan. If you receive a lower payoff than your auto loan balance, it’s your responsibility to settle the remainder. Learn more about why payouts can be less than what you owe and what you can do if this situation happens to you.
What Is a Total Loss and How Is It Determined?
Your insurance company declares your car a total loss when it costs more to fix the damage than the car’s actual cash value or when repair expenses are greater than a percentage of its actual cash value (also called ACV or fair market value). Say your car has a fair market value of $20,000. If you have $16,000 worth of damage, that’s 80% of the fair market value. In states with a total-loss threshold below 80%, it would be considered totaled. If you could sell your vehicle minutes before your accident, how much money could you get for it? Some things that insurance companies use to determine the actual value and the total loss value of your vehicle are its year, make, model, mileage, physical wear and tear, and damage caused in the accident. If your vehicle is relatively new and in great condition, it will have a higher actual value than a car that is old and worn out. If your car is a beater, there’s a good chance that your insurance company will determine that it isn’t worth fixing. Be aware that the totaled-car threshold varies from state to state. If the determined fair market value exceeds the threshold for repairs, your insurer often declares the vehicle a total loss. Then it issues a total-loss payoff settlement if vehicle damage is covered in your policy (typically under collision and comprehensive insurance) and the accident resulted from a covered incident. The amount of this settlement is your car’s current value, minus your deductible. If you still owe money on your car, this payoff, all or in part, goes directly to your lender instead of to you.
Why Your Total-Loss Payoff Is Less Than Your Loan
Many people have faced the frustrating situation of getting a payoff check, only to realize it’s not enough to cover their auto loan’s remaining balance. Here are some reasons your car’s payoff might be less than your loan balance.
Cars Depreciate in Value
The second you drive your new car off the lot, its value begins to depreciate, and it continues to do so over its lifespan. In fact, cars depreciate an average of 20% during their first year and a further 40% in the next four years. If your vehicle’s value depreciates faster than you’re paying off your loan, you may end up with an auto-loan balance that’s greater than the car’s market value. To avoid becoming upside down on car loans, it’s a good idea to choose the shortest loan period you can afford when purchasing a vehicle. That way, you build equity more quickly.
You Don’t Have Gap Insurance
Gap insurance helps cover the gap between what you owe and how much your car is worth. Some lenders require you to have this insurance in place, but it’s an optional product for others. If you don’t have gap insurance, you’re responsible for the difference between your insurance payout and your auto loan balance.
You Rolled Over a Previous Car Loan Into Your Current One
If you rolled over a previous car loan, that negative equity is added to your loan. This means your loan is for more than the current car’s value, and your total-loss payoff likely won’t cover the balance.
Your Car Loan Included an Extended Warranty
If you opted for an extended warranty for your vehicle, its purchase price may have been rolled into your car loan. This means your loan includes more than the cost of the car.
What To Do When You Still Owe on a Totaled Car
If your settlement from your insurance company isn’t sufficient to cover your auto loan, you’re responsible for the difference. Here’s what you can do to address the unpaid balance.
Pay Off the Balance of Your Auto Loan
You must continue to make regular payments until you’ve paid off the loan. The terms of your loan don’t change just because the car is totaled.
Negotiate With Your Insurance Company
If you’re not happy with the payoff from the insurance company, you can attempt to negotiate with it. Do some research to see how much your car is worth; you can check the Kelley Blue Book, local classified ads, the Autotrader website, and similar sources. You must prove that your car is worth more than the insurance company says it is.
Keep Auto Loans Separate
If possible, don’t roll the remaining balance of your loan into a new loan for your next car. If you do, you’ll owe more on the new car than it’s worth. The chances are higher that you’ll have a hard time paying it off if you sell the car or it also gets totaled.
