A car loan can be taken out as a method of financing it over time until the full value 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. 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 insurance you can rely on when your car is totaled, and you still owe money on the loan which financed it.
What Does it Mean When Your Car is Totaled?
There’s a point when repairs cost too much, and that is when your car is totaled. More specifically, the cost of repairs is found to exceed more than 65% of the car’s current market value. After a claim, your 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 car. The insurance payout may not be enough to cover the remaining balance. The insurance company isn’t responsible for paying your loan, so you’re on the line for it. Gap insurance is a popular remedy for filling the gap between the actual cash value of the vehicle you’re received and the remainder of what you owe.
What is Gap Car Insurance?
Gap insurance can be purchased as an add-on to your auto policy. It provides coverage for any “gaps” or expenses that standard liability and property damage won’t cover. This includes the difference between the cash value you received from your insurance company and what you still owe on your 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 insurance provider, car dealership, and even the moneylender. It typically costs anywhere from $20 to $40 annually.
Do You Still Need to Pay 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 insurance provider. You may have worked out an agreement with them that they get to keep the totaled car, so the insurance policy attached to it 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. This 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 the repairs, which will be expensive, then your car is given a rebuilt title and is eligible for registration again. Opting to keep your salvage car can affect your insurance settlement. However, your insurance provider may be hesitant to offer coverage to a car that was totaled.
Is Sales Tax After Replacing a Vehicle Covered by Insurance?
If you didn’t know, there are several states that require insurance companies to pay a sales tax after a policyholder’s totaled vehicle is replaced. This is dependent on state. Some insurers will reimburse you for the sales tax by including it on your payout after totaling a car. You can also request the sales tax reimbursement from them. More specifically, here is a couple of ways that different states handle sales tax after a car is totaled.
Illinois is an example of a state where they require the insurance company to pay the sales tax and title fees in the form of their total loss payout. California operates similarly to this by offering a settlement based on the car’s actual cash value. Texas doesn’t require paying the sales tax at all unless the totaled car is replaced. Virginia has laws that state that insurance companies don’t have to pay the sales tax and other expenses if the auto 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 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 it will not help cover is replacing it 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, then you can put everything towards a replacement.
Gap insurance can also come with some stipulations. Some policies of this nature only cover official automaker parts. So any attachments or custom features listed on your 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, not directly. People often make payments on their cars because it’s a great way to build good credit. If the 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 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 a make and model that is more fuel-efficient or perhaps even a used one. There are several ways to go about finding your new car. Looking into insurance costs can also be a big help. Compare local and national auto insurance providers to see how they price their vehicle coverage for those with an accident that totaled their car on record. Some 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.