By: Chris Reynolds
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What Determines a Total Loss Vehicle
The first thing to do to determine whether or not a vehicle is a total loss (“totaled”) is to calculate the actual cash value (ACV) of the vehicle at the time of the loss. The ACV is essentially what your vehicle is worth after deducting any depreciation. Typically, automobiles depreciate around 20% the first year and about 10% for years 2-5.
After an accident, an insurance adjuster will inspect the vehicle and appraise the damage to the vehicle and how much it will cost to repair. The adjuster then determines the ACV of the vehicle, which can depend based on geographic location, wear and tear prior to the accident, mileage, etc. Finally, if the cost to repair the vehicle is 80% or greater than the ACV, the vehicle is typically deemed a total loss. Another method is to determine the salvage value of the vehicle (what the vehicle is worth for parts, metal, etc.), and then add that to the cost to repair, and if the total is greater than the ACV, then the vehicle is a total loss.
If your vehicle is deemed a total loss, you will have two choices: (1) take a cash settlement for the ACV of the vehicle, or (2) keep the vehicle, though the amount you get is the ACV minus the salvage value of the vehicle. Of course, in most cases, people choose the cash settlement. For example, if the vehicle has an ACV of $10,000, the cost of repair is $15,000.00, and the salvage value is $500, it doesn’t make much sense to keep the vehicle, so people will usually take the $10,000 cash payment. However, sometimes in lower value vehicles with minor damage, the person might opt to keep the vehicle. For example, if the vehicle is only worth $1,000 and has $850 in damage with a $100 salvage value, the vehicle is technically a total loss though it might only need a new bumper and a few dents fixed, so a person might opt to keep the vehicle and instead of getting the $1000 ACV, they will get $900 after the $100 salvage value is deducted.
It’s also important to note that if you go through your own insurance company for this, any deductible will apply, so your deductible will be deducted from any payment to you. However, if you use the at-fault vehicle’s insurance, there is no deductible of course. Typically, it is preferable to use the at-fault insurance for auto repairs or for a total loss vehicle.
Another important consideration is whether or not you still owe money on your vehicle. Of course, any money you owe will be deducted from the payment to you. For example, if your ACV of a total loss vehicle is $10,000 and you still owe $7,500, the insurance company will pay you $2,500 and will pay the lender $7,500 to satisfy your loan.
Occasionally, a person will owe more on their vehicle than the vehicle is worth. This is a product of depreciation and profit made by the dealer who sold you the vehicle. Car dealers don’t sell you vehicles at the ACV of course, or they wouldn’t ever make any profit. Accordingly, if the ACV of a vehicle you purchase is $10,000, you might actually pay $12,500 for that vehicle. If you borrow most of that and only put down $500 toward the vehicle, you then owe $12,000 for a vehicle with an ACV of $10,000. That $2,000 gap between the value of the vehicle and the amount you owe is why gap insurance is essential. If you drive off the lot after purchasing a vehicle and a crash causes a total loss, you suddenly owe $12,000 for a vehicle with an ACV of only $10,000, so you will owe $2,000 for a vehicle you no longer have. The auto insurance company is only responsible for the ACV, so that’s why you should purchase gap insurance to protect against this possibility. Typically, if you didn’t put much money down, you might owe more money on your loan than what the vehicle is worth for 6-12 months, so having gap insurance for that period is essential.