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What Happens If You Total a Financed Car?

What Happens If You Total a Financed Car

What Happens If You Total a Financed Car?

A car loan can be taken out as a method of financing your vehicle over time until the full value of your totaled auto is paid off.

It’s not uncommon to come across a driver that has a loan on their vehicle. But what if you were to total your car while you’re still in the process of paying off the loan?

The actual cash value of the vehicle that your auto insurance company pays out may not be enough to cover the remainder that you owe on your car. You really don’t want to be paying for a car that you can’t even use anymore. That’s why there are certain ways and car insurance you can rely on when your car is totaled, and you still owe money on the loan which financed your vehicle.

What Does it Mean When Your Car is Totaled?

There’s a point when auto repairs after a car accident or collision cost too much, and that is when your car is totaled. More specifically, the cost of vehicle repairs is found to exceed more than 65% of the car’s current market value.

After an auto insurance claim, your car insurance provider pays out the actual cash value that reflects the car’s age and condition prior to the accident. This isn’t the exact replacement cost for a new car but can be put towards it.

However, there may be an issue if you still were paying your loan for the total loss car. The auto insurance payout may not be enough to cover the remaining balance of your car loan. The vehicle insurance company isn’t responsible for paying your car loan, so you’re on the line for paying the loan which financed your vehicle.

Gap insurance is a popular remedy for filling the gap between the actual cash value of the vehicle you received and the remainder of what you owe on your car loan.

What is Gap Car Insurance?

Gap insurance can be purchased as an add-on to your auto insurance policy. Gap insurance provides coverage for any “gaps” or expenses that standard liability and property damage won’t cover after a car accident. This includes the difference between the cash value you received from your vehicle insurance company and what you still owe on your auto loan.

Drivers with an outstanding auto loan utilize gap insurance. You have no way of telling what will happen to the car you’re still paying for while out on the road. Gap insurance can be bought from your vehicle insurance provider, car dealership, and even the moneylender. Gap insurance typically costs anywhere from $20 to $40 annually.

Do You Still Need to Pay Car Insurance When Your Car is Totaled?

You never need to pay for car insurance for a vehicle you can’t drive anymore. So, you want to make check with your auto insurance provider after getting your vehicle totaled.

You may have worked out an agreement with your vehicle insurer that they get to keep the totaled car, so the auto insurance policy attached to your car becomes void after the actual cash value is paid out.

If you want to keep the car, then you will be issued a salvage title. A salvage title means that the car’s plates are no longer valid, and it can’t be registered for new ones until it gets repaired. If you decide to go through with auto repairs, which will be expensive, then your car is given a rebuilt title and is eligible for vehicle registration again.

Opting to keep your salvage car can affect your auto insurance settlement. However, your vehicle insurance provider may be hesitant to offer auto insurance coverage to a car that was totaled.

Is Sales Tax After Replacing a Vehicle Covered by Vehicle Insurance?

If you didn’t know, there are several states that require auto insurance companies to pay a sales tax after a policyholder’s totaled vehicle is replaced. This is dependent on the state. Some auto insurers will reimburse you for the sales tax by including it on your car insurance payout after totaling a car. You can also request a sales tax reimbursement from your vehicle insurance company.

Here are a couple of ways that different states handle sales tax after a car is totaled:

Illinois Sales Tax After Replacing a Total Loss Vehicle

Illinois is an example of a state where they require the auto insurance company to pay the sales tax and title fees in the form of their total loss car insurance payout.

California Sales Tax After Replacing a Total-Loss Vehicle

California operates similarly to Illinois by offering a settlement based on the car’s actual cash value.

Texas Sales Tax After Replacing a Total Loss Vehicle

Texas doesn’t require paying the sales tax at all unless the totaled car is replaced.

Virginia Sales Tax After Replacing a Total-Loss Vehicle

Virginia has laws that state that auto insurance companies don’t have to pay the sales tax and other expenses if the auto insurance policy says they don’t have to.

Some states that don’t have a sales tax include Idaho, Michigan, Montana, New Hampshire, New Mexico, North Carolina, North Dakota, Wisconsin, and Wyoming.

Your vehicle insurance adjuster should be well informed of what your state requires of them.

What Will Car Insurance Not Cover With a Totaled Car?

As previously mentioned, gap car insurance will help cover your existing loan on your totaled car. What car insurance will not help cover is replacing your total-loss vehicle with a new car. This won’t be a problem if you owe less on your car than what a new one is worth. Of course, if you are the owner of your car, then you can put everything towards a vehicle replacement.

Gap insurance can also come with some stipulations. Some auto insurance policies of this nature only cover official automaker parts. So any attachments or custom features listed on your auto loan won’t be covered. Your car with the loan may also have an extended warranty which isn’t covered by gap insurance.

Does Totaling a Car Affect Credit Score?

The short answer is no, totaling your car does not your credit score directly.

People often make payments on their cars because it’s a great way to build good credit. If the auto loan makes up a large portion of your debt and you pay it off, that will look good on your credit report. Moving to a new account after paying your vehicle loan, however, can cause your credit score to decrease.

Where Can You Get a New Car After Totaling One?

Of course, the best way to find a deal on a new car is to shop around and weigh your options. Perhaps it’s time to purchase an auto make and model that is more fuel-efficient or perhaps even a used vehicle.

There are several ways to go about finding your new car. Looking into vehicle insurance costs can also be a big help. Compare local and national auto insurance providers to see how they price their vehicle insurance coverage for those with an accident that totaled their car on record. Some vehicle makes and models are known to be cheaper to insure than others.

Don’t let high annual premiums stop you from driving insured. Contact Insurance Navy today for your free SR-22 quote and see for yourself how cheap coverage can really be.

Call us at 888-949-6289 or use our mobile app to request a quote. Agents are also available to help you in person at one of our many storefronts.

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