Many Americans owe more than their cars are worth. This is called being “upside-down” on a car loan. According to Edmunds, consumers who are upside-down owe an average of $6,046 more than their cars were worth as of the last quarter of 2023.
If your car is totaled and you still owe money, this can become a financial crisis and could lead to legal repercussions. Here’s what you need to know and what you can do about it.
Your Insurance Payout May Not Be Enough To Repay Your Car Loan
If you are involved in an accident and your car sustains such serious damage that the price of repairs adds up to between 51 and 80% of the vehicle’s value, depending on the insurer, the car might be declared a “total loss.”
If that happens, insurance won’t pay to repair it. They’ll give you the fair market value of the vehicle instead. This money could be paid by your insurer under your collision coverage if you were at fault for the accident. If someone else caused the crash, their property damage liability insurer should pay. Consider hiring an attorney to make this a smoother process.
Regardless of which insurance company the money is coming from, the insurer will typically pay out only the car’s current market value (if the policy states it will cover market value; some policies cover replacement value).
This could be less than the amount you owe, especially if you bought a car with a low down payment, purchased a brand-new car that lost value as soon as it was driven off the lot or took a car loan with a long payoff term and have been making only small payments that don’t reduce your loan balance very much.
If your insurer is paying for your vehicle under your coverage, you will also have a deductible to pay. This further reduces the amount of money you could end up with. Unfortunately, you still must pay your entire car loan even if insurance doesn’t pay you the full amount due.
An Example of How Much You Could Owe If Your Car Is Totaled
The table below shows an example of how much you could owe if your car is totaled and you are underwater by the average amount of $6,046 owed. It uses a hypothetical car with a fair market value of $30,000.
| Outstanding Loan Amount | $36,046 |
| Amount the insurer pays (equal to the car’s fair market value) | $30,000 |
| Deductible | $500 |
| Total insurance payout (FMV – deductible) | $29,500 |
| Loan balance not covered | $6,546 |
You would be responsible for paying this $6,546 back to your lender without help from an insurer.
What To Do If Your Car Is Totaled When You Still Owe Money
If your car is declared a total loss, here are some of the options available to you.
Use Gap Insurance Coverage
If you purchase gap insurance coverage, the insurance will pay the difference between what you owe on the vehicle and its worth. So, instead of you having to cover the gap, the gap insurer will.
Gap insurance is often required by car loan lenders and on leased vehicles, so you may have purchased this protection if you have a loan. If you did not have coverage before the crash, though, it will be too late to help you in your current situation.
Take Advantage of New Car Replacement Coverage
If you purchased new car replacement coverage and your car qualifies based on your insurer’s terms and conditions, you should get paid the full amount needed to buy an equivalent new car. In most situations, this should be enough to repay your full loan balance.
Again, this is a type of coverage you must have before the accident happens.
Contest the Valuation of the Vehicle
You do not have to accept the insurance company’s first offer for the amount they’re willing to pay. You can contest their valuation.
This works best if you have solid evidence as to why your car is worth more than the insurance company has agreed to provide to you. You can do this by hiring your own appraiser, or your attorney can find one for you.
Often, you can get the insurer to offer some additional money if you take this approach. However, it may not be enough to pay off your loan fully. That’s especially true if you rely on your collision coverage and have a deductible to pay.
If you are relying on someone else’s property damage liability insurance, it should make you whole after the other driver caused a crash that totaled your vehicle, so you should get the full amount due with no deductible.
A car accident lawyer can help you if you do not believe you are being treated fairly after a collision.
Keep the Totaled Car
You can keep the car and pay for repairs to it yourself. The insurer will deduct what they would have been able to sell your car for at salvage from the car’s estimated current value. Getting your car back in this situation can be challenging, though, and it may have a salvage title until it is repaired.
It may also be difficult to get insurance for the car at this point. In this situation, you can keep paying your loan and pay to repair the car yourself, but it is important to check your loan terms to be sure.
Other Options
Outside of these options, there’s little you can do. Insurers simply aren’t going to pay more than your car is worth unless you have specialized coverage like gap insurance or new car insurance. And if you owe more than that, you’ll still have to pay it back.
This can be a financial hardship, so it’s best to be prepared with the right coverage before you find yourself in this situation.
If you have faced other crash-related losses, such as injuries resulting from the accident, you may also be entitled to compensation for these damages if another driver was at fault or if you have personal injury or medical payments coverage. Be sure to talk with a car accident lawyer about all the different compensation types you may be entitled to.
Frequently Asked Questions (FAQs) About When Your Car is Totaled and You Still Owe Money
Will gap insurance pay off my loan?
Gap insurance is a type of insurance for people with car loans and leased cars. It can pay off the difference between the outstanding loan balance and the fair market value of a car.
Having this coverage is important because many people owe more on their car loan than their vehicle is worth. Since auto insurers only pay the car’s actual cash value when the vehicle is totaled in a collision or stolen, drivers could be forced to make up the difference out of pocket without gap insurance.
Will insurance pay more than a car is worth?
Insurers typically do not pay more than a car is worth if the vehicle is totaled or stolen. This is true regardless of whether you are making a claim for compensation with your own insurer (under your collision or comprehensive coverage) or if you are trying to recover from another driver’s property damage liability insurance after the other driver damaged your vehicle.
What is the actual cash value of a totaled vehicle?
The actual cash value (ACV) of a totaled vehicle is the amount it is worth when it is damaged beyond repair. It is the amount an auto insurer will pay when a crash happens.
In some cases, it is less than the outstanding balance on an auto loan, which can create problems for the car owner, who still must repay the loan in full. Optional gap insurance coverage can protect losses by paying off the difference between the ACV and the loan balance.
