Most lenders require a full-coverage insurance policy as part of your loan agreement. Assuming you have maintained this coverage, your bank will receive a payment for the vehicle's market value from your insurance company in the event your automobile is totaled. Depending on your vehicle's equity, you may still owe money toward your loan or receive a payment from your bank.
Insurance Payoff
While you have a loan on your vehicle, your lender is listed as the insurance policy's loss-payee. This means the insurance payoff amount goes to the bank, not you. If you owe less than the vehicle's payoff amount, the bank will issue you a check for the excess amount. Your insurance company does not consider your loan balance when determining your vehicle's value. Insurance companies figure vehicle values differently; some use an average of local selling prices, while others may use an appraisal guide.
Gap Insurance
In the event that you owe more than your vehicle is worth, a gap insurance policy can cover the remaining balance due. A gap insurance policy is optional, usually purchased from a dealership, a lender or insurance provider. Check your lending contract to see if the extra coverage is included in your bank loan, as leasing banks usually require it. Also check dealership paperwork (if applicable) or ask your insurance provider if you have the additional coverage as part of your policy.
Excess Loan Amount
If you owe more than the car's payoff amount and did not purchase gap insurance, you must pay the excess loan amount yourself. Call your bank to find out if you can set up a payment plan. You may not have to continue making the same monthly payments as you did for your loan, but you must satisfy the loan amount stated in your loan contract even if you do not have the car anymore.
Disadvantages
Other disadvantages may exist until your old car loan is paid off. You may have trouble pursuing another car loan until your old one is satisfied, making it difficult to get another loan immediately. Potential auto loan lenders who view your credit report will see that your car loan is still open. Lenders may ask you to prove various information, such as the insurance company's payoff quote or a payment agreement you have made to satisfy your loan.
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