What Happens When Your Car is Totaled, and You Still Owe on the Vehicle?

At Quanz Auto Body, we know that getting into a car accident is bad enough. It just adds inconvenience and hassle to be without your car while it’s being repaired. But what about when your car is beyond repair—what then? And worse, what happens when you still owe on a car that can’t be repaired? Unfortunately, if your car is totaled and you still owe on it, you could be stuck with a car payment on an undrivable car.

When a Totaled Car Isn’t

When you hear the word “totaled” or “total loss,” you think about a car beyond damaged beyond repair. That isn’t always the case. More often, your vehicle could be repaired—it’s just that the cost of repairs is more than your vehicle is worth.

For example, say your insurance company values your car at $8,000 but repairs after an accident would cost $10,000. The insurance company will deem your car a “total loss” and will not pay for any repairs. Instead, they will pay cash for the value of your car (minus your deductible). If your deductible is $1,000, you would end up getting a check for $7,000.

When You Still Owe

Unfortunately, an accident does not cancel out your car loan. That $7,000 would go directly to the bank to help pay off your debt. If you owed less than $7,000—great! Your loan’s paid off and you may have a few hundred to put down on a new vehicle.

But, if you owe more than your car is worth, you will have to continue to make monthly payments for a car you don’t even have anymore. It’s not a great situation but one that many people find themselves in since car loans now average 60 months to pay off.

Really, there’s not much you can do in this situation. Some states require that the insurance company reimburse your for the sales tax of your car, giving you a little bit of extra cash, but New Mexico is not one of them.

When You Have Gap Insurance

Your story may have a bit of a happier ending if you have gap insurance. Gap insurance will help you pay off your car loan in the event your car is totaled and you still owe on it. However, it won’t help you put money towards a replacement, so you are still out a functional vehicle.

Whether or not you have gap insurance, you can choose to keep your car even if it’s been “totaled.” In this case, your car will have a “salvage” title, which means you cannot apply for new plates until you’ve made repairs…and you may be paying completely out-of-pocket to have those done. If your car was damaged so severely that it was totaled in the first place, it’s more likely than not that it’s not safe to drive in the meantime.

So, here’s the moral of the story: to avoid getting in a situation where an accident may leave you with a hefty bill but no car, carefully consider your car purchase. In addition to the retail price, also keep in mind:

  • The length of loan terms needed to make payments manageable
  • Estimated depreciation of the vehicle

These factors will help you determine if a long-term car loan is really your best option. And if you have any questions about your repairing damage to your car, or if you need an estimate, we’re here to help! Contact Quanz today!