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What Happens if You Crash a Financed Car With Insurance?

Michael Agruss

Written and Reviewed by Michael Agruss

  • Managing Partner and Personal Injury Lawyer at Mike Agruss Law.
  • Over 20 years of experience in Personal Injury.
  • Over 8000+ consumer rights cases settled.
  • Graduated from the University of Illinois Chicago School of Law: Juris Doctor, 2004.

Crashing a financed car can be a troubling scenario, but having insurance in place can be a significant relief. When a collision occurs, the primary concern is for the safety and wellbeing of all involved; however, there soon arises the secondary concern of addressing the financial implications. For those driving a financed car, dealing with insurance companies becomes a vital part of the post-accident process. Here, the role of insurance is to alleviate the financial burden, but this is contingent upon the details of both the insurance policy and the finance agreement.

The initial step after a car accident with a financed vehicle is to inform the insurance company. The insurer will assess the car’s condition and determine if it is repairable or a total loss. The insurance provider’s assessment is based on the car’s actual cash value (ACV) in comparison to the repair costs. If repairable, the insurance plans to cover the costs as outlined in the policy, subject to any applicable deductible. A more complex situation arises if the car is deemed a total loss, where the insurer’s payout will equal the ACV, potentially leaving a gap between the insurance settlement and the remaining balance on the car loan.

For owners of a financed car, understanding the intricacies of gap insurance and the nature of their coverage is crucial. Gap insurance can bridge the difference between the insurance settlement and the amount still owed to the financier, protecting the car owner from out-of-pocket expenses. While not every driver chooses gap insurance, those who do find that it provides additional financial security in the unfortunate event of an accident.

Orange Toy Car Next To Stacked Coins

Understanding Insurance Coverage

When it comes to a financed vehicle, understanding the specifics of your insurance coverage is imperative. It dictates how much protection you have in the event of an accident and can significantly affect your financial responsibilities.

Types of Car Insurance

Liability Insurance: This is mandatory in most states and covers damages you may cause to others in an accident, but not your own vehicle.

Comprehensive Insurance: It covers damages to your car not caused by a collision, such as theft, vandalism, or natural disasters.

Uninsured/Underinsured Motorist Protection: This protects you if the at-fault driver does not have enough insurance to cover the costs of the accident.

Personal Injury Protection (PIP): Often referred to as no-fault insurance, PIP covers medical expenses for you and your passengers, regardless of who is at fault for an accident.

Collision Coverage Explained

Collision coverage is a crucial part of an auto insurance policy for financed cars. This type of coverage:

  • Handles repairs to your vehicle after an accident
  • Is typically required by lenders until the auto loan is fully paid off
  • May come with a deductible, which is the amount you pay out of pocket before insurance kicks in

Insurers assess the damage to your vehicle and provide compensation based on your policy’s terms—up to the covered limit. If the vehicle is totaled, the insurance company will typically pay out the actual cash value of the car at the time of the accident, less any deductible.

If the payout is less than what you owe on your auto loan, you are responsible for paying the difference unless you have gap insurance, which covers this shortfall. It’s crucial to understand the intricacies of collision coverage as it directly impacts how much you’ll be liable for after an accident.

Financial Impacts of Car Accidents

When a car accident involves a financed vehicle, the financial implications can be complex and significant, often revolving around outstanding debts and the determination of insurance settlements.

Owing Money After a Crash

If an individual is involved in a car accident and their vehicle is financed, they may still owe money on their auto loan. The principal concern is that the insurance provider’s settlement amount may not cover the total remaining balance of the car loan, particularly if the car is deemed a total loss. This is the car’s actual cash value versus the loan balance. For cases where the payout falls short, the owner is responsible for the deficit. This is often referred to as being “upside down” on the loan.

Insurance Settlement Factors

The insurance settlement for a financed vehicle post-accident is calculated based on the car’s actual cash value—a term used to describe what the car was worth just before the accident. They consider factors like depreciation, mileage, and pre-existing damage. The settlement amount may cover repairs or, if the car is totaled, compensate for its assessed value. However, as previously stated, this could be less than what is owed on the financing agreement, potentially leaving the owner with out-of-pocket expenses to clear the remaining balance.

In cases where the car’s actual cash value is covered by the settlement, policyholders may still face deductibles and other out-of-pocket expenses directly associated with the claim. It is crucial for vehicle owners with financed cars to hold adequate insurance coverage, including gap insurance when applicable, to mitigate potential financial loss.

The Role of Car Loans in Accidents

Car loans can significantly influence the financial aftermath of a vehicle accident. Insurance claims and the continuous responsibility to repay the loan impact both the settlement process and the borrower’s obligations.

How Car Loans Affect Claims

When a financed vehicle is involved in an accident, the car loan can dictate the terms of the insurance claim. The insurance provider typically offers a settlement based on the pre-accident value of the vehicle. However, this amount must first be directed towards repaying the entire loan balance before the owner can claim any remaining funds. For instance, if the car’s value is assessed at $15,000 at the time of the accident but the outstanding loan is $18,000, the borrower is still liable for the difference.

Car Loan Obligations Post-Accident

After an accident, the borrower retains the responsibility for repaying the entire loan amount, regardless of the car’s condition. If insurance does not cover the full balance, the owner must find alternative means to settle the remaining debt. This could include out-of-pocket payments or, in instances where the borrower cannot pay, potential legal actions initiated by the lender may occur, such as wage garnishment or lawsuits.

Gap Insurance and Its Benefits

When a financed car is involved in an accident and deemed a totaled car, gap insurance can prevent financial strain by covering the difference between the vehicle’s assessed value and the outstanding loan balance.

Understanding Gap Coverage

Gap insurance, or guaranteed asset protection, is a specific type of coverage that one can obtain in addition to their standard auto insurance policy. In the event of a total loss, a standard auto insurance policy typically pays out the actual cash value (ACV) of the vehicle at the time of the accident, which may be less than what is owed on the car loan due to depreciation. Gap coverage, however, is designed to pay the remaining balance that one owes after the primary insurance settlement, ensuring that they are not left to pay out of pocket for a vehicle they no longer possess.

When to Consider Gap Insurance

One should consider gap insurance in situations where vehicle depreciation might outrun the loan payoff schedule. Scenarios include:

Leasing a vehicle: If they are leasing, gap insurance is often required but provides worthwhile protection against depreciation.

Financing a new car: New vehicles can depreciate rapidly—by up to 20% within the first year—making gap insurance crucial if they put down a small initial payment.

High-mileage drivers: High annual mileage might increase the rate of depreciation. Gap coverage could provide needed security.

Long-term car loans: Loans extending beyond the typical 4 to 5-year term can benefit from gap coverage, as the loan balance might not decrease at the pace the car’s value does.

Engaging gap insurance when purchasing a vehicle under these conditions can save one from financial hardships in the event their car is totaled. Various reputable sources such as Forbes Advisor elaborate on the intricacies of gap insurance and its advantages.

Communicating with Your Finance Company

Inform Promptly: Contact the finance company as soon as possible to inform them of the crash, as they have a financial interest in the car.

Share Information: Provide the finance company with the accident report and details about the insurance claim.

Discuss Next Steps: Understand from the finance company what the next steps will be regarding your car finance agreement in the event the car is a total loss or requires repairs.

Total Loss Versus Repairable Damage

When an insured financed car is involved in a collision, insurers assess whether it’s more economical to repair the vehicle or declare it a total loss. The determination hinges on the repair costs relative to the car’s value.

Evaluating Repair Costs

Insurers start by assessing the extent of the damage and estimating repair costs. A qualified adjuster inspects the vehicle and itemizes needed repairs, sourcing the cost of parts and labor. This financial analysis influences whether the car will be repaired or categorized as a write-off. If these costs are manageable and below a certain threshold, the insurance company will authorize repairs.

Total Loss Criteria

A vehicle is considered a “total loss” when repair costs exceed the actual cash value (ACV) of the vehicle at the time of the accident. Each state has a threshold, generally between 65%-70%, which helps define whether a car is totaled or not. If repair costs approach or surpass this percentage of the car’s ACV, insurance companies are more likely to deem the car a total loss and reimburse the ACV to the lien holder, as detailed in Kelley Blue Book’s explanation on Totaled Cars. This leaves the insured party responsible for any outstanding loan balance that exceeds the settlement amount.

Settling with the Insurance Provider

When an insured financed vehicle is involved in an accident, the owner must navigate the claims process to reach a financial settlement. The insurance provider determines a settlement figure which relates to the vehicle’s pre-accident value, and subsequent payout covers the repair or total loss accordingly.

Reaching a Settlement Figure

The insurance provider assesses the damaged vehicle to establish its value prior to the accident. They take into account factors such as make, model, age, mileage, and overall condition. This assessment results in a settlement figure, reflecting the market value the car held before it sustained damage. If the car is deemed a total loss, the insurance payout typically equals this pre-accident value minus any applicable deductions, such as the policy’s deductible.

The Insurance Payout Process

Upon reaching a settlement figure, the insurance provider initiates the payout process. If the vehicle can be repaired, the payout is directed toward the cost of those repairs, up to the policy’s limit, after the deductible is paid by the policyholder. In the event the car is totaled, the insurance payout aims to compensate for the car’s value. However, if the amount owed on the car loan exceeds this payout, the vehicle owner remains responsible for the remaining balance, which is sometimes addressed with GAP insurance to cover the difference.

Dealing with a Totaled Financed Car

When a car under finance is declared a total loss, vehicle owners face the intersection of insurance settlements and remaining loan balances. Understanding insurance write-offs and exploring options are crucial steps after such an unfortunate event.

Insurance Write-Offs

An insurance write-off occurs when an insurer determines that a totaled car is too costly to repair relative to its actual cash value (ACV). In these instances, the insurance company will calculate the car’s ACV and offer a settlement up to this amount. If an individual owes more on their car loan than the ACV, they encounter what’s commonly referred to as being “upside-down” on the loan.

Options After an Insurance Write-Off

Following an insurance write-off, individuals have a few paths to consider:

Insurance Settlement: If the insurance payment is less than the loan balance, the owner is responsible for the difference unless they have gap insurance.

Retaining the Vehicle: In some cases, owners might choose to keep the vehicle and accept a reduced settlement, which is the ACV minus the vehicle’s salvage value.

Gap Insurance: For those with gap insurance, this coverage might pay the difference between the ACV and the remaining loan balance.

Navigating the aftermath of a totaled financed car requires a clear understanding of one’s insurance policy and the terms of the car loan to make informed decisions.

Managing Car Payments After an Accident

Even after an accident, the responsibility to make car payments remains with the vehicle owner. Insurance coverage typically does not alter the loan agreement terms with the lender. If the car is repairable, the owner must continue to make payments during the repair process. In case the vehicle is deemed a total loss, the insurance payout may not always cover the outstanding loan balance, and the vehicle owner will still be responsible for the difference

Legal Considerations and Resources

When involved in a car crash with a financed vehicle, it is imperative to swiftly navigate the legal avenues and access local resources. An understanding of the necessary legal actions and the assistance available can help mitigate the complex legal implications that follow an accident.

Legal Actions After an Accident

Immediately following a car crash, the driver should report the incident to both the insurance company and the lender that financed the vehicle. Documenting everything about the accident is crucial, including taking pictures of the scene, collecting witness statements, and obtaining a police report. In some cases, legal representation by a car accident lawyer from Mike Agruss Law may be necessary to navigate the claims process or any disputes that arise.

It’s important to comply with state laws regarding car crashes. In Illinois, for example, failing to report an accident involving injuries or significant property damage is a violation. Insurance companies typically have strict timelines for filing claims; ignoring these can lead to a forfeit of rights.

If you have any additional questions or concerns, don’t hesitate to reach out to our team here at Mike Agruss Law.

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