What happens to my car loan if my car is written off?

It’s every driver’s worst nightmare; getting into an accident or facing damages so severe that your car is written off. But if you’re still making repayments on a car loan, what happens to your loan if the vehicle is a write off?

Cars are written off more commonly than you’d expect, and it’s not just accidents on the road that you need to worry about. This is particularly true of countries like Australia that frequently experience adverse weather events. For example, destructive events like hailstorms can cause widespread damage to cars, with the cost to repair said vehicle potentially more expensive than the vehicle is worth.

What to do when a car is written off

Whether caused by accident or natural event, if your car has been severely damaged you will need to notify your insurance provider. The insurance provider will then determine whether the car is a write-off (also known as a ‘total loss’) and, if so, which type of write-off it is.

There are two main types of vehicle write-offs: 

1. Repairable write-off: When the cost to repair the vehicle is more expensive than the vehicle’s current value.
2. Statutory write-off: When the vehicle is declared to be permanently unsafe to drive, no matter the repair work.

Drivers can dispute a write-off as it has been declared by your insurance provider. But according to InsuranceLaw.org, drivers have a small window of time (usually less than 7 days) after an assessment to raise a dispute before the insurer reports the vehicle to the written-off vehicle register (WOVR) in your state or territory, which prevents damaged vehicle identification (number plates, VIN) from being resold at auctions or put on to stolen cars. Further, if it is a statutory write-off, you may need to provide expert evidence that the insurer was wrong, and that the damage doesn’t meet the definition of a non-repairable write-off.

If you write off a car on finance, you will often still be required to repay this loan, depending on the contract. The payout from your insurer should hopefully be enough to cover this outstanding amount. If the payout is greater than the amount owing on the car loan, the excess will be paid to the borrower.

But as is often the case with insurance, there may be a gap between the amount paid by the insurer and the financing owing on the vehicle. The borrower will need to pay this out of pocket if they haven’t previously taken out motor equity insurance, also known as car gap insurance, Guaranteed Asset Protection (GAP) insurance, or shortfall insurance. The motor equity insurance provider will pay the car loan lender any shortfall owing from your car insurance provider for the write-off, or if your car is stolen. Just keep in mind that your car’s value and the amount owing on your loan will reduce over time, so the longer you hold a motor equity insurance policy, the less likely you will receive a payout from your insurer.

While a write-off is never the ideal scenario, it’s best to not let it become a worse situation for your finances. If you’re worried about paying the shortfall of your car loan and do not have motor equity insurance, you could speak to your car loan lender about organising a hardship payment plan, as it’s also in their interest that your loan gets paid off.

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