When you finance a car, a lien is established, which serves as a claim to your vehicle and is used as collateral if payments are not made. In many states, the car loan’s lender retains your vehicle’s title and is recognized as its legal owner until the loan is completely repaid. Generally, when you finance a car, you make monthly payments to the entity holding the lien. This lien safeguards the lender, empowering them to reclaim the vehicle if you default on payments.
But what happens to the lien if a car is totaled? Do insurance companies report to lien holders? Can you keep a totaled car with a lien on it? Can a lien be put on a paid-off car? Read on for answers to these and other questions.
- If your vehicle is totaled and you still owe money, insurance should cover the car’s actual cash value, first paid to the lien holder, with you pocketing any remainder.
- The carrier can take around 30 days to pay the claim and pay off the lien on a totaled car.
- If you owe more than your car’s actual cash value, you’ll be responsible for paying the remaining balance on your loan or lease, which is why gap insurance coverage is recommended.
What happens when your car is totaled and you still have a lien?
If you are involved in an accident that totals your financed car, the actual cash value (ACV) of the vehicle should be paid out by either the at-fault party’s liability coverage or your physical damage coverage (collision or comprehensive, depending on how the car was totaled).
The ACV of your vehicle is the amount it was worth the moment before the incident that totaled it and is determined by the car insurance company you filed your claim with.
When there is a lien holder on your vehicle, the settlement check for the car’s ACV goes to that financial institution, and any money left after the payout would come to you.
As part of the settlement process, the insurance company has the lien holder release the title on the vehicle, and the insured signs documents stating that it has no further claim to the car.
When the loan on the vehicle is satisfied by the insurance company payout, the lien on the title is removed, and the insurance company takes possession of the car to dispose of it, usually by selling it for its salvage value.
How long does it take for the insurer to pay off the lien on a totaled car?
Deece Catanzaro, producer and independent agent with Wallace & Turner Insurance in Springfield, Ohio, says your carrier can take around a month to pay off the lien.
“It typically takes about 30 days for the insurance company to pay out the claim and pay off the lien on a totaled car. If the insurance does not cover the balance of the lien, the insurance company will pay off to the amount of insurance coverage listed in your policy,” he says.
How does the insurance company determine the value of my car?
Typically, insurers determine the value of vehicles using different resources, including the Kelley Blue Book.
“Insurers typically determine the value of vehicles based on the actual cash value or what is commonly called market value. This takes into consideration the car’s replacement value minus depreciation,” says Mark Friedlander, director of corporate communications for the Insurance Information Institute in St. Johns, Florida.
Julie Jakubek, an Allstate agency owner in Phoenix, says insurance companies have their own software to determine value by year, make, model, VIN, accessories, condition and mileage.
Can you keep a totaled car with a lien on it?
You may be able to maintain ownership of your totaled vehicle, even if it has been declared a total loss, via a “retaining salvage” process. Here, your carrier typically deducts the value of your damaged car from the settlement, as they can’t sell it at its original worth.
You’re still responsible for repaying the remaining loan balance in full, regardless of the insurance payout, and your lender cannot release the lien on the title until all debts are satisfied. Be aware that most states issue a salvage title for your vehicle, which decreases its value and makes reselling it more challenging.
What if my car insurance doesn’t cover the entire lien balance?
Problems arise when you owe more than the ACV of your vehicle and the settlement from the car insurance company doesn’t pay for the balance of your outstanding loan/lien. Remember that auto insurance companies only pay your car’s current fair market value, not your loan amount.
If you owe more than your car’s ACV, the insurance claim payment based on the car’s market value will be sent to the lien holder, and you will be responsible for paying the remaining balance on your loan or lease, according to Friedlander.
“This is where gap insurance comes into play, as it would cover the difference between the car’s replacement value and what you owe on the loan or lease,” he says.
Gap insurance covers the gap between your vehicle’s actual cash value (ACV) and the amount you still owe on your lease or loan when your car was totaled or stolen.
If you don’t have gap insurance and ACV doesn’t pay off your whole loan, then the lien holder will still release the title to the insurance company but continue to hold you to the terms of your car loan. The lien on the title may be gone, but your responsibility to the lien holder hasn’t changed. Most lien holders will allow you to continue making loan payments or even let you roll this loan in with a new one for a replacement vehicle.
If you are stuck in this situation, talk to your lender about how to pay off the remainder of your loan amount. If you fail to continue to make payments, the lender may take a lien out on your other assets.
The bottom line
If and when your car is a total loss after an accident, there’s a lot to consider. Find out what portion you’ll be responsible for paying out of pocket to any lien holder, and consider purchasing gap insurance to cover this shortfall. Also, weigh the pros and cons of keeping a totaled car and pursuing a salvage title.
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