Question: What happens to a lien on a title when the vehicle is totaled?
Answer: If everything goes perfectly, the lien on your vehicle’s title will be lifted when your lien holder is paid off and signs the car’s title over to the car insurance company handling your total loss claim.
When your car is totaled in an auto accident, the actual cash value (ACV) of the vehicle should be paid out by either the at-fault party’s liability coverage or your physical damage coverage (collision or comprehensive, depending on how the car was totaled).
The ACV of your vehicle is the amount it was worth the moment before the incident that totaled it and is determined by the car insurance company you filed your claim with.
When there is a lien holder on the vehicle, the settlement check for the car’s ACV goes to that financial institution, and any money left after the payout would come to you.
As part of the settlement process, the insurance company has the lien holder release the title on the vehicle, and the insured signs documents stating that it has no further claim to the car.
When the loan on the vehicle is satisfied by the insurance company payout, the lien on the title is removed, and the insurance company takes possession of the car to dispose of it, usually by selling it for its salvage value.
Problems arise when you owe more than the ACV of your vehicle, so the settlement from the car insurance company doesn’t pay for the balance of your loan. Auto insurance companies only pay your car’s current fair market value, not your loan amount.
A remedy to this situation is to purchase gap insurance, which pays the balance of a car loan that remains after an insurer has paid the ACV.
If you don’t have gap insurance and ACV doesn’t pay off your whole loan, then the lien holder will still release the title to the insurance company but continue to hold you to the terms of your car loan. The lien on the title may be gone, but your responsibility to the lien holder hasn’t changed. Most lien holders will allow you to continue making loan payments or even let you roll this loan in with a new one for a replacement vehicle.
If you are stuck in this situation, talk to your lender about how to pay off the remainder of your loan amount. If you fail to continue to make payments, the lender may take a lien out on your other assets.
