Like it or not, the majority of Americans take out a loan when purchasing an automobile. Most auto loans range from $20k to $50k and can be financed up to 6 years. If your car gets totaled in an accident, not only is your life disrupted, but you are still responsible for making the payment. If your the insurance determines your car is a total loss and you still have a loan, you are still responsible for repayment.
In the instance of a total loss, the insurance company will compensate you for the current market value of the car, minus any deductible you may have. In some cases the check you receive is not enough to cover the loan. This is commonly referred to as being “upside down” on the loan. This happens because automobiles depreciate as they age and sometimes that can happen faster than the loan is being repaid which results in owing more than the car is worth.
If your automobile was a total loss after an accident, it does not change your loan’s repayment terms. You still have to repay the lender for the auto loan, even if you no longer have your automobile. The best way to prevent this from happening, if you are concerned, is to purchase “gap insurance.” Gap insurance covers the difference between what the insurance company pays for a total loss vehicle and the amount owed on the auto loan. To find out if you have gap insurance coverage, contact your insurance agent.