What Is Included in the Total Loss Payment
The insurance adjusters will extend an offer of the value of the vehicle. Once the price is agreed to, they will pay the full amount directly to you if you hold clear title to the vehicle. If financing is involved, the insurer will pay the full principal due on the loan and any remaining amount will be paid directly to the owner. In all total loss payments, the insurer will also extend payment of 3 percent sales tax (which allows you to purchase a used replacement vehicle and pay the attendant tax) and tag and title transfer fees (approximately $45.00).
Effect of Vehicle Lease/Financing
If you own your vehicle outright and personally hold the certificate of title, you will receive the full total loss check at the conclusion of the claim. If the vehicle is leased or financed, the finance company will be first in line for payment. In a leased vehicle case, you simply walk away from the vehicle and the insurance carrier would pay off the full balance due under the lease contract. All leases carry GAP insurance coverage, which protects you if the lease payoff is higher than the total loss value. GAP stands for “guaranteed asset protection.” If the lease payoff is $15,000.00 and the total loss payment/value is only $12,000.00, GAP coverage pays the additional $3,000.00 to the bank so that you owe nothing further under the lease contract. Once you learn that your leased vehicle will be handled as a total loss, you can typically begin working immediately with the leasing company to enter a contract to replace the vehicle with a substitute lease.
If your vehicle is financed, significant complications can arise in a total loss claim. Under North Carolina law, financing is not relevant to the determination of value in a total loss case. Longer auto loans that extend five and six years often leave the buyer “upside down” on the financing during the first years of the loan term. Vehicles depreciate quickly with time and use. However, auto loans are amortized over the duration of the loan such that early loan payments are primarily interest payments. Thus, early loan payments do not significantly reduce the principal due on the loan. Unfortunately, if you owe more than the vehicle is worth, the insurance adjuster in a total loss case is not required to pay off your loan. If you do not have GAP insurance coverage on the loan, the total loss payment would be made directly to the financing company to reduce the loan balance. The bank would release the title to the insurance carrier, but they would still be legally allowed to collect the remaining balance (known as a “deficiency balance”) directly from you.
GAP insurance coverage is recommended in every vehicle financing contract. GAP insurance covers the situation where the vehicle is stolen or destroyed and the total loss insurance payment is less than the current balance due on the loan. GAP insurance is very inexpensive, typically adding approximately $30.00 or less to the monthly loan payment. In negative equity cases where the buyer owes more than the vehicle is worth, the insurance adjuster pays the total loss value to the finance company and the finance company will collect the remaining balance due directly from the GAP insurance carrier. Here, you walk away from the vehicle transaction. While you do not receive any additional payment, this is appropriate, as you had no equity in the vehicle.
If you do not have GAP coverage and the total loss offer is less than the balance due on your car loan, you can approach the dealership and finance company to work directly with them toward possible solutions. In some cases, the finance company will allow a “collateral swap.” This is the bank’s option, and you cannot force them to accept a collateral swap. If the bank will agree, they allow you to use the total loss claim proceeds to purchase a replacement vehicle. They then accept the title to the replacement vehicle as substitute collateral for your existing loan. Thus, your payments and loan term remain unchanged. After receiving the new title, the bank will release the title to the damaged vehicle to the insurance company.
If you have manufacturer affiliated financing (e.g., General Motors Acceptance Corporation, American Honda Finance, etc.), you may be able to work with the dealership to confront the deficiency balance situation. In some cases, they will allow you to purchase a new vehicle and fold the unpaid deficiency balance forward into the new loan. If this is allowed, you would have no equity in the replacement vehicle because the new loan includes the purchase price of the new car plus the balance due on the total loss vehicle. However, if you add GAP coverage to the new loan contract, you would be protected in the event of a subsequent collision and total loss.