What happens when your car is totaled: A Comprehensive Guide to Handling Total Loss and Outstanding Loans

When a car is declared "totaled", it means that the cost of repairing the vehicle after an accident or damage is greater than its actual cash value (ACV) or fair market value. This usually occurs when the repair costs would be so high that it does not make financial sense to fix the vehicle. 


In this Comprehensive Guide, the Steps and stages involved in the totaled car dealing process, along with explanations and examples for each step. 

Part 1: Dealing with a Totaled Car  




1. Assessment 

Your insurance company assesses the damage to your vehicle. An adjuster inspects the car to estimate repair costs. 

If your car is in an accident, the adjuster assesses the damage and finds that it will cost $8,000 to repair. 

2. Determination of Total Loss 

If the repair cost exceeds a certain percentage (e.g., 75-80%) of the car's Actual Cash Value (ACV), it's declared a total loss. 

The car's ACV is $10,000, and the repair cost is $8,000, which is 80% of ACV. The car is declared a total loss. 

3. ACV Evaluation 

The insurance company calculates the ACV of your car before the accident based on factors like age, mileage, condition, and market value. 

Your car's ACV is determined to be $10,000. 

4. Payment 

You'll be offered a settlement for the ACV, minus any deductible on your insurance policy. 

The insurance company offers you $9,000 (ACV) - $500 (deductible) = $8,500 as a settlement. 

5. Salvage Title 

The car typically receives a "salvage title" to indicate that it has been declared a total loss. This may affect resale value. 

Your car is issued a salvage title, and its resale value is significantly lower. 

6. Retaining the Vehicle 

In some cases, you can keep the totaled car, but you'll receive a reduced payout that accounts for its salvage value. 

You choose to keep the car, and the insurance company reduces your payout to $6,500, considering the salvage value. 

7. Buying a Replacement 

You can use the insurance payout to buy a replacement vehicle. Ensure any outstanding loans on the totaled car are paid off. 

You use the $8,500 payout to purchase a new vehicle.

Part 2: Handling an Outstanding Car Loan

Detailed explanation of what to do when your car is totaled and you still owe money on it. A clear understanding of how to handle a totaled car when you have an outstanding loan. 




1. Contact Your Lender 

Notify your auto loan lender about the accident and total loss of your car. 

You contact your lender and inform them that your car has been in a severe accident and is declared a total loss. 

2. Determine Outstanding Loan Balance 

Find out the exact amount you owe on your car loan, including interest and fees, by contacting your lender. 

You discover that you still owe $15,000 on your car loan, which includes the remaining principal balance and accrued interest. 

3. Insurance Settlement and Loan Payoff 

Your insurance settlement check is usually made payable to both you and your lender, as your lender has a financial interest in the vehicle. 

Your insurance company issues a settlement check for $20,000, with the payee line showing both your name and your lender's name. 

4. Coordinate with Your Lender 

Work with your lender to understand their specific requirements for loan payoff and lien release. Provide any necessary documentation. 

Your lender requests a copy of the insurance company's letter indicating the settlement amount and a lien release form. You promptly provide these documents. 

5. Loan Deficiency 

If the insurance settlement is less than your remaining loan balance, you'll be responsible for the difference, known as a "loan deficiency." Discuss payment options with your lender. 

The insurance settlement is $20,000, but your loan balance is $15,000. You have a deficiency of $5,000. You discuss options with your lender to pay off this amount, such as a lump sum payment or a payment plan. 

6. Gap Insurance 

If you have Gap Insurance as part of your policy, it can cover the difference between the insurance settlement and the loan balance. Notify your insurer if you have Gap Insurance. 

You discover that your auto insurance policy includes Gap Insurance. You inform your insurance company to start the Gap claim process to cover the $5,000 deficiency. 

7. Settlement Distribution 

Once your lender provides the required information, the insurance settlement will be distributed. Typically, your lender is paid first to clear the loan, with any remaining funds going to you. 

Your lender provides the necessary documents, and the insurance company pays $15,000 directly to the lender to clear the loan. The remaining $5,000 is given to you. 

8. Plan for a Replacement Vehicle 

Since your car is totaled, you'll need to plan for a replacement vehicle. Consider your budget and financing options for a new car. 

With the $5,000 remaining from the insurance settlement, you start shopping for a replacement vehicle and explore financing options if needed. 

9. Update Your Insurance 

If you get a new vehicle, update your insurance policy with the details of your replacement car and ensure it's adequately insured. 

After purchasing a new car, you contact your insurance company to update your policy with the vehicle's information and adjust your coverage as needed. 


In the face of a totaled car and outstanding loans, the road ahead may seem uncertain. However, armed with the knowledge and steps outlined in this comprehensive guide, you're better prepared to navigate these challenging circumstances. 

Remember these essential takeaways: 

1. A totaled car is one where the cost of repairs exceeds its actual cash value (ACV). 

2. Your insurance company plays a critical role in assessing the damage, determining ACV, and offering settlements. 

3. Handling an outstanding car loan after a total loss requires communication with your lender and an understanding of the loan deficiency, if any. 

4. Gap Insurance can be a lifesaver in covering the gap between your insurance settlement and the loan balance. 

5. Be diligent in updating your insurance policy when purchasing a replacement vehicle. 

Your financial well-being and peace of mind are of utmost importance. By following these steps, you can make informed decisions, secure a fair settlement, and drive forward with confidence. 


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