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

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 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?

A car being written off is a more common occurrence 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

In Sydney, 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. And as recently as 2018, many drivers still making car loan repayments were faced with this exact scenario.

What to do when a car is written off

Whether caused by accident or natural event, if you believe 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 value of the vehicle.
  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 to raise a dispute (usually less than 7 days). Further, if it is a statutory write-off, its often “very difficult” to resolve the dispute without “significant evidence that the legislative requirements of a non-repairable car have not been met and the insurer was wrong”.

The vehicle will then be registered in the Written-Off Vehicle Register (WOVR), which assists in preventing damaged vehicle identification (number plates, VIN) from being resold at auctions or put on to stolen cars

If a car is written off and there is still finance owing, the borrower will still be required to repay this loan - depending on the contract. However, your insurance provider is generally obligated to pay 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 either pay this out of pocket or may have had the foresight to take out motor equity insurance.

Motor equity insurance is an insurance designed for just this scenario. The motor equity insurance provider will pay the car loan lender any shortfall owing from your car insurance provider for the write-off.

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, speak to your car loan lender about a hardship payment plan. They should be able to assist you as its in their interest that the loan be paid off.

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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