Crashing your car is stressful, but crashing a financed car brings even more questions. If you still owe money on your auto loan, and you are involved in an accident, you may wonder how insurance works. The good news is that having car insurance will help. However, how the process plays out depends on your coverage, who is at fault, and how much you owe on the loan.
In this blog, we will walk you through exactly what happens if you crash a financed car while it is insured. We will cover how your loan, insurance claim, and potential out-of-pocket costs work together. You will also learn what coverage you need to avoid debt after a total loss accident. Whether it is a minor fender bender or a serious collision, this guide will help you feel more prepared.
Understanding How a Financed Car Works
When you buy a car with a loan, you do not fully own the car until you pay off the balance. The lender, such as a bank or finance company, holds the title while you make monthly payments.
Because the lender has a financial interest in the car, they require you to carry full insurance coverage. This means you need:
- Collision coverage to pay for damage from a crash
- Comprehensive coverage to pay for theft, vandalism, or weather damage
Together, these are known as full coverage. You must keep this coverage active for the entire loan term.
What Happens Right After the Crash?
If you crash your financed car, here is what usually happens step by step:
1. Ensure Everyone Is Safe
Move to a safe place if possible, check for injuries, and call 911 if needed.
2. Contact the Police
Always get an official accident report, even if the damage seems minor. This report helps when filing your insurance claim.
3. Notify Your Insurance Company
Call your insurer as soon as you can. Give them the accident details, photos of damage, and a copy of the police report if available.
4. File a Claim
Once your claim is filed, an adjuster will inspect the damage and decide how much the insurance company will pay.
What Will Insurance Cover?
When your financed car is insured, what is covered depends on your policy and who caused the accident.
If You Are at Fault
- Collision coverage will pay for damage to your car after your deductible
- Liability coverage will pay for the other party’s damage or injuries
If Someone Else Is at Fault
- Their liability insurance should cover your damage
- If they are uninsured, your uninsured motorist coverage may help
In both cases, if the damage is repairable, the insurer will pay for repairs. If the damage is too severe, the car may be declared a total loss.
What Is a Total Loss?
A car is considered a total loss when the cost to repair it is more than the actual value of the car. Insurance companies use their own calculations, but a car is often totaled if repairs cost around 70 to 80 percent of its current market value.
Example:
- Your car is worth $18,000
- Repairs are estimated at $16,000
- Insurance declares it a total loss
If your car is totaled and still financed, the situation becomes more complex.
What Happens to the Loan?
When a financed car is totaled, your insurance company pays the actual cash value of the car not what you still owe. This means:
- If your car is worth more than your loan balance, you keep the difference
- If your loan balance is higher than the value, you still owe the remaining amount
Example:
- You owe $20,000
- The car is worth $16,000
- Insurance pays $16,000 to your lender
- You still owe $4,000 out of pocket
This situation is called negative equity.
How to Protect Yourself From Owing Money After a Crash
If you owe more than your car is worth, your best protection is gap insurance.
What Is Gap Insurance?
Gap insurance covers the “gap” between what your car is worth and what you still owe. It pays the difference if your car is totaled.
Example:
- Loan balance: $22,000
- Car value: $17,000
- Insurance pays $17,000
- Gap insurance pays the $5,000 difference
Without gap coverage, you would need to pay that $5,000 yourself.
Can You Still Drive the Car If It’s Repairable?
Yes. If the car is not totaled, your insurance company will pay for repairs, minus your deductible. Because the car is still under loan, you must repair it with a licensed shop and restore it to roadworthy condition.
Keep in mind:
- Your lender may require proof that repairs were done
- If you ignore repairs and continue driving, your insurance and loan may be at risk
How Can Non-Custodial Parents Save on Insurance?
Car insurance can get expensive, especially for teen drivers. If you’re the one responsible for the policy, here are some ways to lower your costs:
1. Good Student Discount
If your child maintains a B average or better, you may get up to 20% off.
2. Defensive Driving Course
Some insurers offer discounts if your teen takes a driving safety course.
3. Low-Mileage Discount
If your teen only drives occasionally, let your insurer know they may offer lower rates.
4. Telematics Programs
Programs that track driving behavior can reduce costs for safe teen drivers.
5. Add to Existing Policy
In some cases, it’s cheaper to add your teen to your own policy than to buy a separate one.
Will Insurance Cover a Rental Car?
If your policy includes rental reimbursement coverage, your insurance may pay for a rental car while yours is being fixed. This is useful if repairs take several days or longer.
If your car is totaled, rental coverage usually ends once a settlement offer is made.
Does Your Car Loan Stop After the Crash?
No. Your loan agreement stays in place even if the car is totaled. You are still responsible for paying the full balance unless your insurance and gap coverage fully cover it.
If you do not have gap insurance and owe more than your payout, you must pay the remaining balance or work out a payment plan with your lender.
Will Your Insurance Go Up After the Crash?
It is likely. Even if you are not at fault, filing a claim can cause your premium to increase. On average, a car accident can raise your rate by 20 to 40 percent depending on:
- Who was at fault
- Severity of the damage
- Your previous driving record
To avoid higher premiums, some drivers compare rates from other providers. You can use Alias Insurance to get free quotes and find better options after an accident.
What If You Want to Keep the Car After It’s Totaled?
In some states, you can buy back your totaled vehicle from the insurance company. This is known as owner retention.
Here is how it works:
- Insurance pays the actual value minus the salvage value
- You pay the buyback amount
- You take the car and repair it yourself
Keep in mind:
- The car will have a salvage title
- It must pass a safety inspection to be road legal
- Lenders and insurers may be less willing to work with salvage cars
This option may help if you want to repair the car cheaply or cannot afford a new one.
Common Mistakes to Avoid
1. Letting Your Insurance Lapse
If your insurance expires while the car is financed, you are breaking your loan agreement. Lenders may add expensive force-placed insurance to your loan balance.
2. Not Having Gap Insurance
Without it, you may owe thousands out of pocket if your car is totaled.
3. Accepting a Low Payout
Always research your car’s value on websites like Kelley Blue Book or Edmunds. If your insurer offers less, you can negotiate with supporting documents.
4. Delaying Your Claim
The longer you wait, the harder it is to file a successful claim. Notify your insurer right after the accident.
Key Insurance Terms to Know
| Term | Meaning |
| Collision Coverage | Pays for damage to your car from a crash, regardless of fault |
| Comprehensive Coverage | Pays for non-crash events like theft, fire, or hail |
| Liability Coverage | Covers damage and injuries you cause to others |
| Gap Insurance | Covers the difference between loan balance and car value if totaled |
| Actual Cash Value (ACV) | What your car is worth at the time of the accident |
| Deductible | Amount you pay out of pocket before insurance covers the rest |
FAQ: People Also Ask
Yes. Your lender expects payment until the loan is fully paid. Insurance may help, but if it does not cover the full amount, you are responsible for the difference.
Insurance companies use market data from sources like Kelley Blue Book and recent sales to calculate the car’s actual cash value. Age, condition, mileage, and features all play a role.
If another driver caused the crash, their insurance should pay for your damage. However, you may need to use your own insurance first and get reimbursed later through subrogation.
Yes, if your car is totaled and the insurance payout is more than your loan balance, you can use the remaining funds as a down payment for a new car.
You may need to negotiate with your lender, explore debt repayment plans, or seek legal advice. Some lenders offer hardship options in cases of total loss.
Final Thoughts
Crashing a financed car while it is insured can feel overwhelming, but knowing what to expect can make the process smoother. Insurance will usually cover repairs or pay the actual value if the car is totaled. But your financial responsibility may not end there if you owe more than the car’s current worth.
Gap insurance is one of the best ways to protect yourself from loan debt in case of a total loss. And having the right coverage in place before an accident can save you thousands.
If you are looking for affordable and full coverage policies that protect your investment, use Alias Insurance to compare quotes from top providers in the United States. Make sure you are never caught off guard after an accident.
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