Why a Total Loss Payoff Can Be Less Than an Auto Loan

A totaled car on the street.

Martin Diebel / Getty Images

You have had an accident that destroyed your car and, now, could be disappointed with your total loss payoff check from your insurance provider. It is not as uncommon as you might think. Lots of people are underwater on their car loans. Being underwater on a loan means you owe more than your car is worth at any time during your loan. This situation can put you at risk of receiving a payoff check that is lower than your auto loan balance.

You Won't Get Money for Car Depreciation

It is pretty much common knowledge that cars depreciate. You will never get your money back out of a car unless you drive it for 20 years. You are paying a pretty penny for the use of a vehicle whether you finance it or not the minute you drive it off the dealership lot.

Your vehicle is most likely insured for Actual Cash Value, aka what it is worth at the time of loss. If you are not able to pay 20% down on your auto loan, you need gap insurance to cover the difference. 

Extended Car Loans Could Mean No Gap Insurance

Why do people take out extended car loans? To get a lower payment right? What happens when you make a lower payment? The amount you owe is reduced at a slower rate, often slower than depreciation.

Anyone purchasing a car loan with a term longer than four years is an ideal candidate for gap insurance. If you owe a lot more than what your total loss payoff check is issued for, you probably have an extended car loan with no gap insurance.

Don't Combine Your Past Auto Loan With a New Loan

A storm is definitely brewing if you were enticed into wrapping your old car loan in with your new. Your car insurance is not going to pay an old debt, even if it is wrapped into your current car loan. A total loss accident means its time to pay up or try to get a lender to wrap the difference of this loan into a new one (which is never recommended). 

Warranties Aren't Covered in a Total Loss

Any money paid for a warranty is not covered by a total loss insurance claim. Insurance companies insure vehicles, not additional coverage plans. So many times, people wrap a warranty into their car loan and think nothing of it.

That is until a total loss situation, now you have to pay for a warranty on a car you can no longer drive. Make sure to check into canceling your warranty, a refund is not impossible.

Keep Sales Tax, Title, and Registration in Mind

Taxes and title fees are not so cut and dry. More than half of all the states are required to cover these expenses. It is certainly a good idea to ask your claim's rep if the fees are covered and what restrictions apply.

Often these expenses are only covered after another vehicle is purchased and it needs to be within 30 days of the payout. Insure.com lists out each individual state's requirements.

Consider Buying a Vehicle With a No-Down-Payment Auto Loan

A great way to get a total loss payout lower than your car loan payoff is to buy a vehicle with no money down. A total loss accident will be your worst nightmare if you do not have gap insurance. Again it comes down to depreciation. Think of it as paying your down payment now vs. at the time of purchase.