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What to do if you have a totaled upside-down car loan?

  • Cars Explained
  • Xavier Sabastian
  • 4 minutes

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Suppose you have negative equity or owe the bank more on the car than it is worth if you have an upside-down car loan. Totaling your car can appear to ruin your year, but it’s excruciating if you have a car loan that’s in default. As more people take longer car loans to purchase cars, this is becoming a more common problem.

The average new car loan is around $30000 with a 68-month term. The average length of time it takes to pay off a new car loan is nearly six years. When you throw in the fact that cars depreciate quickly, it’s easy to see why people may owe more on their auto loans than the vehicle is worth.

What to know about upside-down loan car insurance?

How can you avoid ending up in this situation? We’ll go over the specifics with you here.

What does it mean if your car is totaled?

If your car is totaled, it implies the insurance company has concluded that the cost of repairs is greater than the vehicle’s value. After you’ve paid your deductible, the insurance company will pay you the vehicle’s actual cash value (ACV) instead of paying for repairs. This represents the vehicle’s fair market value, including depreciation, when it was damaged in the accident. The actual cash value is not the same as the replacement value, which would replace the exact vehicle today.

What happens to the insurance of a upside-down car?

How long can you be upside down for? When a car is declared a total loss, auto insurance companies never pay more than the vehicle’s value. Your collision deductible will reduce the actual cash value. Because your car is financed, the money would not be sent directly to you. It would instead go straight to the bank. Alternatively, the check might be written out to you and your lender, which you would sign and mail to your bank.

What happens if you still own the totaled car?

Consider the following scenario for your upside-down car loan:

You owe $20000. Your car is worth $15000 at the time of the accident. You have a $1000 deductible. For your totaled automobile, your auto insurance provider would pay $14000. So you’d still owe your lender $6000, $20000 for a car loan, $1000 is the maximum amount that can be deducted, insurance ACV payoff of $15000, and you would still owe $6000 to the lender.

For most of us, $6000 isn’t little change, but you’ll have to pay it yourself unless you have gap insurance.

If you have an upside-down car loan, gap insurance is a good idea. It will frequently pay the difference between the vehicle’s actual cash worth and the amount still owing on it. In addition, some gap insurance packages may cover your collision deductible.

Upside down car loan: Is insurance still required if your car is totaled?

If your insurance company declares your car totaled and pays you, the car no longer belongs to you and no longer requires your insurance. Likewise, you don’t need to insure the car if you’ve reached an arrangement with the insurance company to keep it if it can’t be driven. Work with your insurance agent to figure out the best way to prevent not only paying for insurance on a car that can’t be driven but also a coverage gap.

Is it possible to keep your car if it’s totaled?

Many states mandate that a car’s title be transferred to a “salvage title” if insurance totals it. Unfortunately, that implies you won’t be able to register for plates until the damage is repaired. You can apply for a new title after the repairs are done. A damaged car is frequently auctioned off. The vehicle insurance firm continues to make sales. 

Do you prefer to hold on to your totaled car with the permission of the state? Your car insurance company will ask salvage buyers for offers to determine a reasonable market value. The amount will then be deducted from your settlement. This varies from state to state. So, if you decide to keep the automobile and make the necessary repairs, consult with your insurance adjuster to determine if it’s worthwhile.

A word of caution: comprehensive and collision coverage on the rebuilt car may not be available from your insurer. Why? An insurer may be unsure how to value a previously totaled vehicle. If you’re considering keeping your totaled car, bear that in mind.

upside-down car loan

Check out our blogs for info on finding top-rated airport parking, the best parking spots in your city, and affordable car washes near you.

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