Key Takeaways:
- You still owe your title loan if you total your car, but insurance can help
- If you are at fault, your insurance will help with the cost up to the coverage limits
- If you are not at fault, the other driver’s insurance will help with the cost
- If you don’t pay your debt and let it go to collections, it can hurt your credit
If you borrow money against your car, the car is the collateral. So what happens if your car is totaled and you have a title loan? Most of the time, you’ll be on the hook for the balance unless your insurance payout covers the balance.
Here’s everything you must know about title loans and what could happen if you’re in a car accident.
What Happens to Your Title Loan if Your Car is Totaled?
One of the reasons title loan lenders require you to carry full car insurance on a title loan is for cases like this. If you have a total loss from a car accident, it doesn’t forgive the debt you owe. You still owe money to the lender regardless if you have the car any longer.
The key is to read your loan agreement carefully to know what happens if you are in an accident that totals your car and you have a title loan. If you have a remaining balance, most lenders will work with you and not require the full amount upfront, but it can vary by lender.
What Happens When You Are at Fault for the Accident?
If you were at fault for the accident, your collision coverage may pay for the damages to your car. If your car is a total loss, the insurance company will determine the car’s fair market value and pay you that amount minus any amount you owe to lien holders, such as a title loan lender.
Because title lenders have a lien on your title, they receive payment before you do. Here’s an example:
You have a title loan with a $3,000 outstanding balance and cause a car accident that causes a total loss. The insurance company determines your car is worth $5,000. They will pay the lender $3,000, and you will receive the remaining $2,000.
If you owed $6,000 and the insurance company determined the car was worth $5,000, you’d be on the hook for the extra $1,000 and receive no money in your pocket. You’d have to work out a plan with the lender to repay what’s left.
What Happens When the Other Driver is at Fault for the Accident?
If the other driver caused the accident, their liability coverage would cover the loss of your vehicle. This is good news for you because you wouldn’t have to make a claim on your insurance and risk your rates increasing.
However, just like if you used your collision coverage to pay for the damages, the insurance company can only pay the fair market value of your vehicle and/or up to the limits of the driver’s insurance coverage.
If the coverage isn’t enough to pay the remaining balance, you may be responsible for the difference and need to work out a plan to pay it in full.
What if You Don’t Have Insurance?
If you don’t have insurance, you are 100% liable for the remaining balance on the loan. Without insurance protection, you don’t have anyone helping you to pay the debt. In this case, it’s very important to contact your lender immediately to work out a plan for the loan balance. If you just ignore the balance and don’t pay it, you could end up with an account in collections or get sued by the lender.
Do You Still Have to Pay the Title Loan if You Have a Totaled Vehicle?
It’s disappointing that when you no longer have a car, you still have to pay the title loan, but that’s part of the agreement when you borrow a vehicle title loan. That’s why it’s important to only borrow what you need and can afford to repay, even if you lose your car.
If you’re worried about your car’s value decreasing and being unable to repay the title loan if you are in an accident, consider gap insurance. While no states require this type of coverage, it can provide peace of mind if you’re worried an insurance payout won’t cover the amount due.
How do Title Loans Work?
Title loans are secured loans that use your car as collateral. You agree to make monthly payments to the lender in exchange for tapping into your car’s equity. The equity is your car’s actual cash value minus any loans you owe.
Title lenders typically allow you to borrow 20% to 70% of the car’s value. While you have a title loan, you can still drive the vehicle if you pay on time. Title loans typically have high interest rates, and the lender can repossess your vehicle if you don’t make your payments.
How to Qualify for a Title Loan
Qualifying for a title loan is simple and requires the following:
- Proof you own a qualifying car and your name is on the title
- Proof you do not have any liens on your vehicle title
- Evidence of stable monthly income, such as pay stubs, bank statements, or award letters
- A copy of your auto insurance, if required by law or the lender
- A copy of the vehicle registration, if required by the lender
Do Title Loan Lenders Require Auto Insurance?
Auto insurance is often a requirement to get a title loan because it protects the loan’s collateral. If you are involved in a car accident, the insurance settlement can help pay off the title loan balance, allowing you to buy another vehicle.
Most lenders require full auto insurance coverage to ensure their investment in your loan is protected should you be involved in an accident or the car experience damage or theft. Full coverage ensures the vehicle is covered for almost any occurrence, causing you to be unable to make the loan payments.
FAQ
What Happens to Your Credit If Your Car is Totaled?
Your credit should not be affected if your car is totaled. You’d only see effects on your credit report if you don’t pay the balance on a title or car loan. If you leave the balance unpaid, the lender will likely send the account to collections, who will report the negative information on your credit report. Otherwise, if you or the insurance company pay the balance, your credit remains unaffected.
Does Your Credit Score Go Up When Insurance Pays Off Your Car?
Your credit score may decrease slightly after paying off the loan because the lender typically closes the account, which affects your credit length, but it will typically go back up, especially if it decreases your debt-to-income ratio and you make your other loans on time.
What Happens if Your Title Loan Goes to Collections?
If your title loan goes to collections, there are several things that can happen:
- The collections agency will try to collect the debt
- They may take legal action against you in court
- They can start the repossession process
Final Thoughts
Driving a car is scary because you never know what could happen. If your car is totaled and you still have a balance on your title loan, you may still owe the balance if your insurance company doesn’t cover it.
If you have questions about title loans and how they work after an accident, or you have a title loan you cannot repay, contact Montana Capital today. Our representatives can help you determine what you can repay with what insurance covers and how to work out the rest if you have a balance.
Written by
Samantha Hawrylack
Samantha Hawrylack writes for our company and is an expert in personal finance. Sam received her Bachelors of Science in Finance and her Masters in Business Administration from West Chester University of Pennsylvania. She began her career in the financial services industry and shifted to an entrepreneurial role where she could directly impact clients. Sam has an impressive background in personal finance and business management.