What happens if my car is written off and it’s on finance?

For many customers, car finance has proved a highly popular and beneficial choice, enabling them to safely and conveniently purchase a car, without forcing them to break the bank.

Although car finance is an ideal solution for many people across the country, there are some situations where the question of responsibility can seem unclear, or where the nature agreement can feel confusing.

A key example of this is if the car is written off, but it has been purchased on finance. This is a commonly asked question amongst buyers, as it is not immediately apparent what should be done in this situation.

So, to help resolve this common query, our vehicle experts have shared their complete guide to what happens if your car is written off and it’s on finance.

Keep reading to find out more about what will most likely happen next, what this means for your insurance cover, and the options that you have, if this situation occurs.

What does it mean to buy a car on finance?

Buying a car on finance is the process of buying a vehicle, in part with the help of a loan or credit agreement. This loan is usually provided by a bank, credit union, a car dealership or another financial institution.

This means that, instead of having to pay the full cost of the vehicle upfront, you can pay the total cost in smaller amounts, through regular payments over a fixed period. Buying a car on finance is a great solution for many buyers, as it means that the cost is spread out into more manageable, affordable payments.

What happens if you write-off your car when you have purchased it on a finance agreement?

A car ‘write-off’ is a term used by insurance companies, for cars that are either so damaged that they cannot be repaired, or where any repairs will cost more than the actual value of the car.

If you write-off your car, then your insurance company will determine what category of write-off your vehicle comes under (more on this below). Then, their next course of action will be based on the extent of the damage, and how easy and affordable it is to repair.

After your insurance company has conducted its assessment, a valuation and settlement will take place. The insurance company will determine what market value your car had (prior to the damage), and it will use this sum to determine its settlement.

This settlement is usually paid from the insurance company directly to the lender. This is because, if the car has been written off, then it will remain the property of the financial institution, until you have repaid your finance.

However, in some cases, the insurance settlement may be lower than the remaining balance left to pay on your vehicle. If this occurs, then you will need to continue with your payment schedule to the lender, until the balance is fulfilled.

It’s important to know that you will need to continue repaying your finance on the vehicle, even if it has been written off. You will also need to inform your lender of what has happened, and the fact that the car has been written off.

What are the different insurance categories for car write-offs?

These insurance categories are designed to classify the extent of the vehicle’s damage, and how feasible a repair would be.

The main insurance categories for vehicle damage are:

• Category A – complete write-offs. The damage is beyond repair, and the car must be scrapped.
• Category B – the vehicle cannot be repaired, but some parts of the vehicle can be recycled or potentially reused.
• Category C – the vehicle could be repaired, but the cost would be higher than the value of the vehicle.
• Category D – the vehicles could be repaired but, although the repair cost would be lower than the value of the vehicle, other associated costs would make it higher than the vehicle’s value. A common example of this is transporting the vehicle.
• Category S – vehicles that can be repaired after they incurred structural damage.
• Category N – vehicles that can after they incurred non-structural damage.

You can find more categories and a more detailed breakdown of each on the Gov.uk website.

What does this mean for your insurance cover?

If your finance car has been written off, then you will need to make a claim on your insurance. The insurance company will then pay the lender the car’s pre-accident market value (minus excesses).

If there is still outstanding finance on the vehicle after this payment, then the process will follow that outlined in the section above. If there is no finance outstanding, your written off car will become the insurance company’s property.

From there, they will usually get the car scrapped on your behalf. You may find that your insurance premium goes up, as a result. The extent of the increase depends on the circumstances of the incident, and the specific policy of the insurance provider.

If your car is written off, contact your insurance provider, and they will be able to guide you through the process.

Should I get gap insurance?

Guaranteed asset protection insurance (gap insurance) is, as its name suggests, designed to cover the ‘gap’ between the insurance settlement, and the outstanding finance balance on your vehicle.

This is a specialist type of insurance policy, precisely designed for purchases made on finance. It means that, if your car is written off, then the difference in cost between the vehicle’s valuation and the remaining amount owed on the vehicle is covered.

If you know that you would struggle to cover this difference in cost yourself, or you have a large remaining balance left on your vehicle, then you might find that gap insurance offers a valuable safety net.

The best way to ensure your vehicle is safe and road ready, is to have regular servicing from a garage like Watling Tyres – we have several garages across Essex covering tyres, vehcile servicing and MOTs.