How Is Total Loss Value Calculated?

Find out why your total loss payout may be less than your loan

GIF shows two men in a mechanic's shop with a red car moving into frame. Text reads: "How total loss value is calculated: year, mileage, model, make, physical wear and tear, damage from accident"

The Balance / Michela Buttignol

If your car receives heavy damage in an accident or other covered event, your insurance company may declare it a total loss. When that happens, you might receive a total-loss payoff settlement from your insurer—assuming you have comprehensive or collision coverage. 

Unfortunately, this payment isn’t always enough to cover the amount of money you owe on your car loan. If you receive a lower payoff than your auto loan balance, it’s your responsibility to settle the remainder. Learn more about why payouts can be less than what you owe, and what you can do if this situation happens to you. 

Key Takeaways

  • Your insurance company may declare your vehicle a total loss if repair costs outweigh the car’s fair market value or a percentage of it.
  • You’re responsible for paying off the rest of your car loan if your total-loss payout doesn’t cover the full balance. 
  • When applying for an auto loan, strategic decision-making can help keep you out of financial trouble if your car gets totaled later on.

What Is a Total Loss and How Is It Determined?

Your insurance company declares your car a total loss when it costs more to fix the damage than the car’s actual cash value or when repair expenses are greater than a percentage of its actual cash value (also called ACV or fair market value).

Say your car has a fair market value of $20,000. If you have $16,000 worth of damage, that’s 80% of the fair market value. In states with a total-loss threshold below 80%, it would be considered totaled. If you could sell your vehicle minutes before your accident, how much money could you get for it? 

Important

Actual cash value is another way of saying what the vehicle is worth at the time of loss. It can be hard to put an exact number on it without some help, but each insurance company has its own way of calculating this value. 

Some things that insurance companies use to determine the actual value and the total loss value of your vehicle are its year, make, model, mileage, physical wear and tear, and damage caused in the accident.

If your vehicle is relatively new and in great condition, it will obviously have a higher actual value than a car that is old and worn out. If your car is a beater, there’s a pretty good chance that your insurance company will determine that it isn’t worth fixing. Be aware that the totaled-car threshold varies from state to state. 

If the determined fair market value exceeds the threshold for repairs, your insurer often declares the vehicle a total loss. Then it issues a total-loss payoff settlement if vehicle damage is covered in your policy (typically under collision and comprehensive insurance) and the accident resulted from a covered incident. The amount of this settlement is your car’s current value, minus your deductible. If you still owe money on your car, this payoff, all or in part, goes directly to your lender instead of to you.

Why Your Total-Loss Payoff Is Less Than Your Loan

Many people have faced the frustrating situation of getting a payoff check, only to realize it’s not enough to cover their auto loan’s remaining balance. 

Insurance companies only pay fair market value, so if you’re “upside down” on your auto loan that amount likely won’t be enough to fully pay off your loan. 

Here are some reasons your car’s payoff might be less than your loan balance.

Cars Depreciate in Value

The second you drive your new car off the lot, its value begins to depreciate, and it continues to do so over its lifespan. In fact, cars depreciate an average of 20% during their first year and a further 40% in the next four years. If your vehicle’s value depreciates faster than you’re paying off your loan, you may end up with an auto-loan balance that’s greater than the car’s market value.

To avoid becoming upside down on car loans, it’s a good idea to choose the shortest loan period you can afford when purchasing a vehicle. That way, you build equity more quickly. 

You Don’t Have Gap Insurance 

Gap insurance helps cover the gap between what you owe and how much your car is worth. Some lenders require you to have this insurance in place, but it’s an optional product for others. 

If you don’t have gap insurance, you’re responsible for the difference between your insurance payout and your auto loan balance. 

You Rolled Over a Previous Car Loan Into Your Current One

If you rolled over a previous car loan, that negative equity is added to your loan. This means your loan is for more than the current car’s value, and your total-loss payoff likely won’t cover the balance. 

Your Car Loan Included an Extended Warranty

If you opted for an extended warranty for your vehicle, its purchase price may have been rolled into your car loan. This means your loan includes more than the cost of the car. 

You may be eligible for a partial refund on your unused warranty if your car is totaled. To check, reach out to the company from which you purchased the warranty or your dealership.  

What To Do When You Still Owe on a Totaled Car

As mentioned, if your settlement from your insurance company isn’t sufficient to cover your auto loan, you’re responsible for the difference. Here’s what you can do to address the unpaid balance. 

Pay Off the Balance of Your Auto Loan

You must continue to make regular payments until you’ve paid off the loan. The terms of your loan don’t change just because the car is totaled.

Negotiate With Your Insurance Company

If you’re not happy with the payoff from the insurance company, you can attempt to negotiate with it. Do some research to see how much your car is worth; you can check the Kelley Blue Book, local classified ads, the Autotrader website, and similar sources. You must prove that your car is worth more than the insurance company says it is. 

Keep Auto Loans Separate

If possible, don’t roll the remaining balance of your loan into a new loan for your next car. If you do, you’ll owe more on the new car than it’s worth. The chances are higher that you’ll have a hard time paying it off if you sell the car or it also gets totaled. 

Frequently Asked Questions (FAQs)

What happens to your car when it’s considered totaled?

If your car is totaled, you need to transfer the title to your insurance company before it will send your payout. Your insurance agent can walk you through how to do this. Then, they often sell the damaged car to a salvage vehicle dealer. 

How do I keep a totaled car?

States have different rules on keeping your totaled car, so first you need to research your local regulations. If you keep it, the insurance company deducts the salvage value from your payoff. Then you arrange to get the car repaired.

How do I get rid of a totaled car?

If your car is totaled, you need to clear out your belongings from inside the vehicle, remove the license plates, and locate your title and keys. Next, you’ll need to surrender the car to the insurance company. Contact your agent for the exact steps in this process.