What Makes a Car a Total Loss?

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Your insurance company is likely to deem your car a total loss if repair costs exceed its value or the damage is so severe that state law requires it to be totaled. When this happens, you'll receive a payout for its actual cash value minus any deductible. However, if you still owe money on the car, your leasing or finance company will be paid first.

How Total Loss Is Calculated

Although state laws and insurance policies differ, a vehicle is typically considered a total loss under a few circumstances. If it costs more to repair your car than what the car is currently worth, your insurance company will label your vehicle totaled. Your car may also be totaled if its repair costs plus salvage value is more than its worth. A car's salvage value is the amount of money your insurance company could receive if it sold your totaled car to a licensed salvage dealer. Your car may also be deemed a total loss if its condition requires it to be totaled in accordance with state law. If your car cannot be safely repaired, it can also be totaled.

Current Value of Car Is Determined

Once your car is labeled as a total loss, your insurance company will move on to the business of calculating its value so that it may issue you a check. The amount you will receive is your car's actual cash value. This represents the current market value of your car after considering such factors as its year, make, model, mileage and condition, as well as the resale value of comparable cars in the area. Once this is determined, the insurance company will then deduct your deductible amount and issue you a payment for the remaining balance.

Finance or Leasing Company Paid First

If you still owe money on your car, the insurance company will issue claim payment to your finance or leasing company instead of you. If you leased the vehicle, the full amount of the insurance payment will go to your leasing company. However, if you financed the car, the insurance company will first pay the balance due on the loan to your financing company and the rest to you. If you owe more on the loan than the actual cash value of the car, you will not receive anything. You are responsible for whatever balance remains after the insurance payment is applied.

Keeping a Salvaged Car

If you want to keep your car, it may be possible depending on state law and the policy of your insurance company. Since the car has been deemed a total loss by your insurance company, it is considered a salvage vehicle. If permitted to keep it, your insurance company will deduct the salvage value from the car's actual cash value and pay you the difference. It's important to keep in mind that your car's salvage status may prevent you from obtaining first-party collision and comprehensive insurance in the future, you may be required to register and title the car as a salvage vehicle, and some repair shops may refuse to work on your car.