What happens to my car loan when the car is written off?

A car accident and having damage so severe that your car is instantly written off is every driver’s worst nightmare. But, what happens if the car is written off and it’s under finance?

Written-off cars are more widespread than you’d think and it’s not just due to road accidents. In Australia, adverse weather conditions also contribute to write-offs like hailstorms. The cost to repair hail-damaged cars can potentially be more expensive than the value of the car.

What do you do when your car is written off?

Whether your car has been damaged in an accident or a natural episode, you should notify your insurance provider immediately if you believe that it has been adversely impacted.

Your insurance provider will need to establish if the car is a write-off, which is also known as a total loss, and the type of write-off it is.

The two main types of vehicle write-offs are:

1. Repairable write-off: when the cost to fix the car is more expensive than its value.
2. Statutory write-off: when the car is deemed to be permanently unsafe to drive regardless of the repairs completed.

Drivers can dispute a write-off if their insurance provider has declared it. However, there is a small window of time to raise said dispute, which is usually within seven days.

Additionally, if the car has been declared a statutory write-off, it’s often hard to resolve it without “significant evidence that the legislative requirements of a non-repairable car have not been met and the insurer was wrong”.

Once it has been declared a write-off, the car will be registered in the Written-Off Vehicle Register (WOVR), which helps in the prevention of damaged vehicle identification, such as number plates, and VIN, from being resold at auctions or being used on stolen cars.

If you find that your car has been written off and there is still finance owing on it, you are required to repay the loan, depending on the terms of your contract. Your insurance provider is usually obligated to pay the outstanding amount however, if the payout amount exceeds the amount owing on the car loan, the excess will be paid to the borrower.

There may be a gap between the amount your insurer paid and the finance still owing on the car, and you’ll have to pay out of pocket if you haven’t taken out motor equity insurance.

What’s motor equity insurance?

Motor equity insurance is designed for the above situation. The insurance provider will pay the lender any shortfall owing from your car insurance provider for the write-off, or if your car has been stolen.

While a write-off is never a scenario one wants to be in, be mindful of your financial situation and understand how you can prepare for this.

If you don’t have motor equity insurance and are worried about being able to pay the shortfall of your car loan, get in touch with your lender regarding a hardship payment plan as it only benefits them that the loan is paid off.