Auto loans can haunt you even after the vehicle is totaled

It is a regular occurrence: two cars collide in a Charlotte intersection. Though there are no injuries, damage to one of the vehicles is significant and that driver’s insurance company later declares the car is a total loss.

While the driver is fortunate to walk away from a motor vehicle crash without any injuries, if he owes a significant amount on his car loan, he might not be able to walk away from the wreck without an ongoing financial obligation – even though the accident was not his or her fault!

What’s a total loss?

Typically, insurers will “total” a car if the cost of repairs exceeds about 80 percent of the vehicle’s value.

Let’s say your insurer determines that your vehicle was worth $20,000 when the crash happened. If repairs will cost more than $16,000 (which is 80 percent of the vehicle’s value), the car is deemed a total loss.

So the insurer will then write you a check for $20,000.

But what if you still owe $30,000 on your car loan? Bad news: you are still on the hook to the bank or finance company for the $10,000 not covered by the insurance payment for your wrecked vehicle.

The loan persists

Yes, even if the car was “totaled,” your financial obligation to repay the loan continues.

This type of scenario most often involves people who have gotten long-term financing plans (60 months or more) to keep their monthly payments low. But the value of the vehicle depreciates faster than the balance on the loan, and in the crash scenario described above, that person can wind up owing money on a car that cannot be fixed or driven.

Some auto insurers offer coverage that eliminates this problem, but of course, that coverage costs extra.

As noted at the top of this post, these types of occurrences are not uncommon, so it’s something to consider when you’re negotiating a vehicle’s price or buying insurance.