Every year in America, about 23 million vehicles are damaged in car accidents. Eighty-five percent of all new cars purchased in the United States are financed. When the person finances a vehicle, a lien is placed on the vehicle. That is usually a first position lien, which means that if your car is totaled, the lien, the financing, the bank, the lending institution has to pay off that loan before you get any money.
In the state of Florida, a car is determined to be a total loss if the cost to repair it together with the salvaged value, that’s the value of the vehicle as it is, if that is at least 80% of the actual cash value of the vehicle then it’s declared a total loss. You are then entitled to recover the actual cash value of the vehicle. Now, depending on how recent you made the purchase or how much you financed for your purchase, you may find that the amount owed on the vehicle is actually more than the actual cash value or the amount that the insurance company is willing to give you for your totaled vehicle. We have other content on how to get the most or more money for your wrecked car. Be sure to check that out for some pointers on that front. Click here!
We’re talking about the decision that’s been made that the vehicle is totaled and you’re in this sort of upside-down position. You don’t have enough money so, even if you’re not upside down, your loan is still going to be paid off first. The insurance company will have to pay the lender directly, and that may only leave you a little bit of money to go and find a replacement vehicle. Worse off is where there is no money to you because the loan exceeds the actual cash value of the vehicle. That’s a big problem, just because the insurance company pays, the car was totaled, that doesn’t mean you don’t still owe the lender whatever the balance may be. For example, if you owed $12,000 on the vehicle, it was declared a total loss, the value of the vehicle was $10,000 and the insurance company pays your lender $10,000. You’re still on the hook for the other $2000 owed to the lender with no recourse going against the at fault driver because you’re only entitled to recover the actual cash value of the vehicle.
It’s a real bad problem. Your options include, you can keep paying your monthly payment even though you don’t have a vehicle, that’s a real tough position to be in. You could talk to the lender, see if you could get forgiveness or adjustment because of the hardship that you’re in. You can consider rolling that extra amount into new financing on a vehicle. This is one of the things we find that often puts people in this negative equity position. This upside-down position is by trading in vehicles that didn’t have the value that had equaled the loan on them, that loan gets rolled into a new loan on a new vehicle which causes that vehicle to be further upside down. Then, if you have a wreck in a short amount of time following that, it’s just impossible to recover from that situation, but it is a method to try to recover from an upside-down situation when your vehicle is totaled. None of those options are great, this applies whether it’s against your own insurance company under collision coverage, or it’s under the other driver’s insurance policy under their property damage coverage. This still applies regarding being upside down and compared to a total loss situation.
You do have one option that you have to do ahead of time, which is to purchase GAP Insurance. It’s a optional insurance coverage. Some lenders require it, some lenders really push it when you’re taking out the loan to get the vehicle, and it’s an additional cost. It’s a insurance. What GAP Insurance will do is pay any difference, cover any difference between the actual cash value and the amount that you owe. Now, you’ll still end up in that situation coming out with no vehicle and no money, but at least you’re not without having a vehicle and owing money. GAP insurance would cover the gap for that difference between the actual cash value and the amount of your outstanding loan on the vehicle.