A vehicle loan is a legally binding contract. When you sign for a loan, you assume responsibility for the funds loaned for the car purchase. Through this financial assumption, you are obligated to repay that amount, according to the terms of the contract. Unfortunately, anything that happens to the vehicle once you purchase it does not negate your legal responsibility to repay the loan, even if the vehicle is involved in an accident.
Upon financing a vehicle, you authorize a lender to purchase the car. You then pay the lender for the amount of the vehicle, plus interest, over a period of time. Because the lender has already paid for the car, the lender remains in possession of the car title until the balance of the loan is paid in full. This gives the lender the right to reclaim the vehicle if loan payments cease. If your car is in an accident and requires repairs, you must continue to make payments on the vehicle. The same holds true even if a car accident results in the vehicle being damaged beyond repair.
Many car accidents are minor and don't require repairs. However, in the event that repairs are necessary, and the cost to repair the vehicle exceeds the vehicle’s value, your insurance company will “total” the car. When this occurs, the insurance company will recover the car and send you a check for the car’s current fair market value. The fair market value of the car may be less than you currently owe on the vehicle. This may mean that you will still be making payments on a car you no longer possess.
Failure to make payments on a car following an accident, whether the car is operational or not, can result in repossession. The lender will then attempt to sell the vehicle to recover the unpaid balance of the loan. In the event that the full balance is not recovered, or the vehicle itself is not available for recovery, your lender may file a lawsuit against you for the outstanding amount. Provided that your state permits the practice, a deficiency judgment can be levied against you. If you are employed, the lender may request a wage garnishment through the courts until the debt is satisfied.
If you owe more on your car than its fair market value and are concerned about the possibility of an accident, opt for gap insurance. Gap insurance can be purchased through your lender or car insurance provider. In the event that your car is totaled in an accident, the gap insurance policy will kick in to cover the unpaid loan balance after you receive the insurance company’s fair market value price for the car. Many insurance providers will require you to maintain collision and comprehension coverage on the car to be eligible for gap insurance.
Continuing to make regular payments on your car after an accident will ensure that you retain legal possession of the vehicle. If, however, you default on the loan and the car is repossessed, the repossession will appear in the “Public Records” section of your credit report. A subsequent deficiency judgment will also appear on your credit file. Judgments and repossessions have a negative effect on your credit score and will remain on your report for years to come --- even if you pay the full balance owed to the lender. Additionally, acquiring financing for future vehicles will prove difficult, if not impossible, with a repossession on your credit report.
- How Does the Insurance Company Determine a Car is a Total Loss After an Accident?
- What is Gap Insurance?
- Facts For Consumers/Vehicle Repossession: Understanding the Rules of the Road
- Federal Trade Commission. "Vehicle Repossession." Accessed Sept. 30, 2020.
- Experian. "How Long Does It Take for a Repossession to Come off Your Credit?" Accessed Sept. 30, 2020.
- Nolo. "Deficiency Judgment." Accessed Sept. 30, 2020.
- Experian. "What is a Buy Here, Pay Here Dealership." Accessed Sept. 30, 2020.
- Georgia Department of Banking and Finance. "Repossession (Vehicles)." Accessed Dec. 20, 2019.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.