Disasters can cause anything from minor damage to a complete loss of your vehicle. If you still have a loan on the car, you might be unsure of what happens next. The outcome depends first on your insurance company’s decision: is the vehicle repairable or a total loss? From there, your financial responsibility may change depending on whether you have GAP coverage.
Step 1: File an Insurance Claim
Comprehensive coverage (if included in your policy) typically applies to disasters like floods, fires, or severe weather. The insurance company will inspect your vehicle and determine one of two outcomes:
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Repairable damage: This generally means the estimated cost to fix your vehicle is less than what the car is currently worth on the market. The insurer authorizes repairs, pays the repair shop directly (minus your deductible). In many cases, insurers will use new or rebuilt parts, depending on the age of your car. Just keep in mind that repairable doesn’t always mean quick; repairs can take weeks if damage is extensive or parts are delayed, so rental car coverage (if included in your policy) can help keep you on the road. Remember, even though you may not be in possession of your vehicle while it is being repaired, you must continue making your regular loan payments.
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Total loss: A total loss means the cost of repairs is greater than or close to the actual value of the car at the time of the disaster. Instead of paying for repairs, the insurance company pays you (or your lender, if you still have a loan) the actual cash value (ACV) — what your car was worth immediately before the damage, factoring in depreciation, mileage, and condition. Because cars lose value quickly, the ACV payout is often less than what you still owe on the loan. This is where Guaranteed Asset Protection (GAP) coverage is important: it steps in to cover the difference between your loan balance and the insurance payout.
Step 2: Determine GAP Coverage
If you're vehicle is repairable, you'll work with your insurance company and repair shop to coordinate repairs and explore options for temporary transportation. If your insurance has determined your vehicle is totaled, the next step is to determine if you purchased GAP coverage.
1) Insurance pays your car’s ACV to your lender.
2) GAP pays the remaining balance on your loan to your lender
3) Your loan is closed, and you are no longer responsible for making payments.
Example:
Loan balance: $20,000
Insurance payout: $16,000
GAP coverage pays: $4,000
Remaining balance: $0
1) Insurance pays your car’s ACV to your lender.
2) You are responsible for the difference if your loan balance is higher than the payout.
Example:
Loan balance: $20,000
Insurance payout: $16,000
Remaining balance: $4,000
1) Insurance pays your car’s ACV to your lender.
2) GAP pays the remaining balance on your loan to your lender
3) Your loan is closed, and you are no longer responsible for making payments.
Example:
Loan balance: $20,000
Insurance payout: $16,000
GAP coverage pays: $4,000
Remaining balance: $0
1) Insurance pays your car’s ACV to your lender.
2) You are responsible for the difference if your loan balance is higher than the payout.
Example:
Loan balance: $20,000
Insurance payout: $16,000
Remaining balance: $4,000
Step 3: Understand Your Obligation to Repay
If your loan has been fully satisfied by insurance and GAP, you can begin shopping for a new vehicle.
If your auto loan has a remaining balance after your insurance payout, you are still responsible for making your regular loan payments despite no longer being in possession of the vehicle. Several options are available when it comes to paying your loan:
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Pay your auto loan as-is: You can choose to keep your auto loan and make the agreed upon payments.
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Pay off the your auto loan with a personal loan: While personal loans tend to have higher rates because they are unsecured debt, you may be able to leverage longer terms to help reduce your monthly payment.
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Roll your remaining balance into your next vehicle loan: This option can help consolidate your finances and ease the burden of managing multiple payments. However, it can be financially risky; you may end up owing more than what your new vehicle is worth; this is often times referred to as negative equity, being underwater, or upside down.
Step 4: Shop for a New Vehicle
Once you have a plan to manage your payments, the best first step to get you back behind the wheel is to is to apply for preapproval. Preapproval is a free, no-obligation process that gives you an idea of just how much you may be eligible to borrow before you start shopping.
Get Started
If you ever find yourself facing the loss of a vehicle, remember, you don’t have to navigate it alone. If your insurance settlement doesn’t fully cover your loan, or if you anticipate difficulty keeping up with payments, please reach out to us. We are here to support you, whether that means discussing repayment options, exploring refinancing, or helping you get into your next vehicle with confidence. Our priority is your financial well-being, and we’ll work with you every step of the way.
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