So, what exactly happens if your car on finance is written off? Let’s walk through the process, from understanding your finance agreement to settling insurance claims and managing the financial impact.
Understanding car finance
Before diving into the specifics of what happens when your financed car is written off, it’s essential to understand how car finance works. There are typically two main types of car finance agreements you might have: Personal Contract Purchase (PCP) and Hire Purchase (HP).
With a PCP agreement, you don’t fully own the car unless you make a final payment at the end of the term. In contrast, with HP, ownership transfers to you once all payments are made.
Until then, the finance company technically owns the car. This ownership distinction becomes important when the car is written off because, technically, it’s their asset, not yours.
What happens when your car is written off?
If your car is written off, it means the cost of repairs would exceed the car’s value, or the damage is too severe for it to be safely repaired.
Once your insurer determines that the car is a total loss, they will provide a payout based on the car’s current market value, which is often less than what you paid for it originally.
However, this doesn’t mean the finance agreement is settled. If the amount you still owe on the finance agreement is more than what the insurance company pays out, you’re responsible for covering the shortfall.
How insurance covers your written-off car
Your insurer will pay out the current market value of the car, which may not cover the remaining balance on your finance. This difference is known as a shortfall.
💡 For example, if your car is valued at £10,000 but you still owe £12,000, you would be left with a £2,000 shortfall after the insurance payout.
If, on the other hand, the insurance payout exceeds the outstanding balance, you’ll receive the difference. However, in most cases, the payout is rarely enough to fully cover the finance amount, leaving you with a remaining debt.
Gap insurance
This is where gap insurance becomes a lifesaver. Gap insurance covers the difference between the insurance payout and the amount you owe on your finance agreement.
💡 For instance, if you had gap insurance in the previous example, it would cover the £2,000 shortfall, leaving you free from any remaining debt on the car finance.
Without gap insurance, you would have to pay the shortfall out of pocket, which can be a significant financial burden.
It’s worth considering gap insurance when you take out car finance, especially if you’re putting down a small deposit or choosing a long finance term, as these factors increase the likelihood of being in a negative equity situation.
Settling the finance agreement
Once your car is written off, the insurance payout typically goes directly to the finance company. They will use this amount to settle part of the outstanding finance.
However, as mentioned earlier, if there’s a shortfall between what the insurer pays and what you owe, you will still be liable for the remaining balance.
Depending on your finance agreement, you may also face early settlement fees or penalties. It’s essential to review your contract to understand these terms, as they could add to your financial obligations after the car is written off.
Can you get another car on finance?
If your car is written off and you’ve settled the finance (either through insurance, gap insurance, or personal funds), you might be wondering if you can finance a new car. In most cases, yes—you can apply for a new finance agreement to replace your written-off vehicle.
However, keep in mind that the write-off could potentially impact your creditworthiness, especially if there was a delay in settling any outstanding amounts.
Before diving into a new finance agreement, it’s crucial to review your financial situation and consider whether you can afford to take on another car loan.
Key tips for protecting yourself financially
To avoid the financial strain that comes with a car write-off, it’s essential to protect yourself from the start. Here are a few tips:
- Understand your finance agreement: Make sure you know the terms of your car finance, especially who owns the car and what happens if it’s written off.
- Review your insurance policy: Ensure your car insurance policy covers you adequately. Some policies might not provide the full market value in a write-off situation, so it’s worth checking if any additional cover is needed.
- Consider gap insurance: This is especially important if you’ve financed a new or nearly new car. Gap insurance can save you from having to pay a shortfall between the finance amount and the insurance payout.
Wrapping up
When your financed car is written off, it can feel overwhelming, but understanding the process can help ease the burden. From dealing with insurance payouts to covering any remaining finance balance, there are steps you can take to protect yourself.
By understanding your finance agreement, reviewing your insurance coverage, and considering gap insurance, you’ll be better prepared for the unexpected, ensuring you’re not left out of pocket in the event of a write-off.
🚗 Further reading: How to check if a car is written off.
