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UPDATED: Mar 13, 2020
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Whenever you finance a vehicle, you do not properly own the car until all payments have been completed and the car is paid off. Whether you are leasing or simply making payments toward ownership, the financing company is allowing you to use the car on the agreement that you will pay for it incrementally until the loan has been satisfied. Because you do not own the car outright, you risk losing the vehicle if you fail to uphold your half of the agreement. Missed car payments can result in a vehicle repossession, which allows the financing company to seize your vehicle and hold it until you either pay off the owed money or relinquish your rights to the car.
Once your car has been repossessed, the only way to get it back from the bank is to pay off the amount you are behind on payments plus any applicable fees. Depending on the situation, you may need to buy the vehicle back from the lien holder. If you are not able to satisfy the loan within the time required, your financing company will sell your vehicle to someone else at auction.
Will my car insurance cover a repossessed vehicle?
Because you agree to these terms at the time your vehicle is purchased, you must abide by the financing company’s rules. This means that if you lose your car due to repossession, you cannot take any legal action against the bank and your car insurance will not compensate you for the loss of your vehicle.
Fortunately, your auto insurance will pay for damage caused to your vehicle before and during the repossession process. Whenever you buy insurance for a financed vehicle, your lien holder will require you to maintain full coverage auto insurance on that car until the loan has been paid. This means that you agree to carry collision and comprehensive coverage in addition to the state-mandated liability insurance.
First-party car insurance pays for damage to your vehicle caused by a named peril, such as a collision or vandalism, regardless of who was at fault for the damage. You, as the vehicle’s owner, are responsible for a portion of the repair cost called your deductible. Once the deductible amount has been paid, the remaining cost of repairs will be covered by the insurance company. If the vehicle is not repairable, the company will offer a settlement cost based on the vehicle’s actual cash value.
In addition to carrying full coverage auto insurance, your lien holder will also require you to repair any damage that your vehicle sustains. This means that if you are involved in a car accident and file a claim with your insurance, you must use the funds from the claim settlement to repair the damaged vehicle. In order to ensure that this happens, the insurance company will issue all claims checks two-party to yourself and the body shop or lien holder.
Whenever your vehicle is repossessed, a representative from the financing company will examine the vehicle to see if it has any damage!
If damage is discovered, the company will contact your insurance company to file a claim. At this point, an estimate will be written and faxed to the insurance adjuster, who may or may not need to look at the vehicle himself in order to offer settlement.
Because the financing company technically owns the vehicle at this point, the claim settlement check will be issued directly to the lien holder. You are still responsible to pay your deductible, however, and this payment must be made to the lien holder who has your vehicle.
If you fail to pay your deductible or if your insurance is not sufficient to cover the damage to your vehicle, you will be sent to collections for the amount you owe on the damaged car. This means that you will need to pay for damage to a vehicle that you no longer own. Because of this, it’s always important to maintain sufficient insurance on your vehicles and keep enough money set aside to cover your deductible.
Insurance will not always pay for damage to your repossessed vehicle, however. If the insurance adjuster completes the estimate and determines that the damage was not caused by a covered peril, the claim will be denied. For example, insurance companies will not pay for mechanical damage caused by general wear and tear of a vehicle. At this point, you may be responsible for paying for a portion of the damage yourself.
The safest bet is to always maintain your vehicle and keep the appropriate insurance on the car at all times. Let your financing company know if you are having problems paying your car payment so that they may be able to work with you rather than repossessing your car.