You probably know that new cars depreciate the moment you drive them off the lot. That means unless you’ve put down a large down payment, you probably owe more than the vehicle is worth by the time you get home. That doesn’t always change as you pay down the loan. USA Today recently reported that 31% of automobile loans in the U.S. are underwater–in other words, that the remaining balance on the loan is higher than the value of the car. That percentage is even higher for vehicles purchased since 2022.
That creates problems for vehicle owners in many ways. To sell the vehicle, they may have to kick in some extra money to pay off the loan. If they want to trade in the vehicle, they may end up with excess from the loan rolled into their new loan, raising the balance on the new car loan. But what happens if the car is totaled in an accident?
Here’s what you need to know if there’s a lien on your car and the insurance company has totaled the vehicle.
When is a Car Totaled in South Carolina?
In South Carolina, a car is considered totaled when the damage to the vehicle exceeds 75% of the value of the car. For example, if the car is worth $20,000 and it will cost $16,000 to fix it, the insurance carrier will classify it as a total loss. In some circumstances, a vehicle that doesn’t meet that definition will nonetheless be classified as a total loss.
This is where things can get sticky for a vehicle owner who has a lien on the car. Imagine that in the example above, the outstanding balance on the auto loan is $25,000. However, the property loss is the value of the car–$20,000. Depending on the circumstances, the vehicle owner may be entitled to compensation from the responsible party’s insurance carrier or their own insurer. The problem is that the payout from either will be based on the value of the car.
Since there’s a lien on the car, the $20,000 will go to the lender. But that leaves the owner of the vehicle with no car and an outstanding loan balance of $5,000. In some circumstances, that remaining balance can be much more.
Gap Coverage Can Help
One thing South Carolina drivers can do to protect against this situation is purchase gap coverage. Gap coverage pays off the balance of your auto loan if your car is totaled. Some auto lenders may require a car buyer to carry gap coverage to protect the lender’s security interest. Or, a vehicle owner may choose to purchase this type of coverage to avoid being stuck with a loan balance if the vehicle is totaled.
What Happens if I Don’t Have Gap Coverage?
If the value of the vehicle is lower than the balance of the auto loan, the vehicle owner will have a few options. One is to pay the remaining balance on the loan. How realistic that is will depend on a variety of factors, including the amount of the remaining balance and the borrower’s financial situation. This may be further complicated if the borrower was seriously injured and can’t return to work right away, or loses their job because they don’t have transportation.
Some people also choose to file bankruptcy to discharge the remaining balance. Whether that’s a good decision depends on the borrower’s other debt and finances. If the accident also involved injuries or other losses, it’s important to note that the injury claim will be considered an asset in the bankruptcy case, which could mean losing some or all of your settlement. This decision should only be made with advice from both a Charleston car accident lawyer and a local bankruptcy attorney.
Help for Victims of Charleston Car Accidents
This post discusses one of many issues and obstacles a Charleston car accident victim may face. The best source of information about your next steps is a knowledgeable Charleston car accident attorney. To learn more about your options, call 843-300-7600. The initial consultation is always free, and there’s no obligation.