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When you drive off the lot with your new vehicle, it immediately begins to depreciate in value, sometimes by as much as 20% in the first year. But what happens when that vehicle is involved in a collision?
Beyond repair costs and insurance claims, one of the most overlooked financial consequences of an accident is accelerated depreciation, which can create a dangerous imbalance between your vehicle’s current market value and the amount remaining on your auto loan.
Vehicle Depreciation in Real-World Terms
Depreciation refers to the reduction in a vehicle’s value over time due to wear and tear, mileage, market demand and age. However, after an accident, even if your car is professionally repaired, its resale value drops even further due to what’s known as diminished value.
There are three types of diminished value:
- Immediate Diminished Value: The reduction in value immediately after an accident, but before repairs
- Inherent Diminished Value: The loss in resale value after repairs, simply because the vehicle now has an accident history
- Repair-Related Diminished Value: Value lost due to substandard repairs or use of aftermarket parts
In the used car market, a vehicle with a reported collision (even if fixed perfectly) can sell for thousands less than one with a clean history.
How Depreciation After an Accident Affects Your Auto Loan
If your car is worth less after an accident than what you still owe on your auto loan, you’re in what lenders call a negative equity position or “upside-down on your loan.” For example:
- Original loan: $30,000
- Current loan balance: $24,000
- Post-accident market value: $19,000
This gap becomes even more problematic if the vehicle is totaled. Insurance typically pays out Actual Cash Value (ACV) and not the amount you owe. Without special coverage, you’re stuck paying the remainder of your loan out of pocket.
Even though the car was repaired, you are still paying loan installments on a now-devalued asset. This affects both your current finances and future trade-in or resale potential.
The Role of GAP Insurance
Guaranteed Asset Protection (GAP) insurance is specifically designed to cover the difference between your vehicle’s ACV and the remaining balance on your loan if your car is totaled or stolen.
Example:
- Loan balance: $26,000
- ACV payout after total loss: $20,000
- GAP coverage pays the remaining $6,000
For instance, in Wisconsin, GAP insurance is optional, but often highly recommended, especially if:
- You put down a small or no down payment.
- You financed the car for more than 60 months.
- You drive a vehicle with fast depreciation (e.g., luxury sedans, electric cars).
- You rolled over negative equity from a previous car loan.
If you didn’t purchase GAP coverage and your car is totaled, you may face a legal and financial headache trying to cover the difference.
Can You Recover Diminished Value After an Accident?
In our Milwaukee example, Wisconsin law allows third-party diminished value claims. That means if you are not at fault in an accident, you can pursue compensation from the at-fault driver’s insurance for the reduced resale value of your vehicle, even if repairs were done well.
However, this is not automatic. To succeed in a diminished value claim in our example, Milwaukee, you typically need:
- A clean title and accident-free history prior to the crash
- A post-repair inspection from a qualified appraiser
- Proof of diminished value, often through comparable market analysis or expert testimony
Most insurance companies will resist paying diminished value claims unless pressured by strong evidence or legal representation.
Note: If you are at fault or filing under your own collision coverage, your insurer may not allow a diminished value claim unless explicitly included in your policy.
Accidents and Auto Loans: The Lender’s Perspective
From a lender’s perspective, your auto loan is a secured debt (secured by the vehicle itself). If the value of that asset plummets after an accident, your lender doesn’t care. You’re still obligated to pay the full amount of the loan, regardless of the car’s diminished value.
If your car is totaled and the payout doesn’t cover the loan balance, and you don’t have GAP insurance, lenders can:
- Demand payment in full for the remaining balance
- Report missed payments to credit bureaus
- Send your balance to collections or pursue legal action
This can cause long-term damage to your credit, which may affect your ability to finance another vehicle.
Legal Remedies
Dealing with the complex aftermath of a crash can require outside expertise, such as that provided by car accident lawyers. If the other party is at fault, a lawyer may help you:
- File a diminished value claim with their insurance
- Negotiate for repair costs, rental car fees and lost value
- Preserve and collect evidence from the crash, including repair estimates, accident reports and dealership trade-in values
- Identify hidden sources of liability, such as commercial vehicle ownership, road design defects or multiple at-fault parties
If your loan becomes unaffordable due to depreciation, an attorney may also refer you to a financial advisor or bankruptcy attorney to explore restructuring options.
Protecting Yourself Before and After an Accident
To minimize the risk of financial harm from post-accident depreciation, drivers should consider the following:
- Buy GAP insurance if you’re financing a new or nearly new vehicle
- Insist on OEM parts (original manufacturer) when repairing your vehicle
- Keep detailed records of all repairs, inspections and appraisals
- Request a diminished value appraisal after your car is repaired, especially if the other driver was at fault
- Consult skilled car accident lawyers before accepting a settlement from the insurance company
Get a Dedicated Car Accident Lawyer on Your Side
A car accident can leave lasting financial scars far beyond the immediate damage. Vehicle depreciation, especially when coupled with an outstanding auto loan, creates a perfect storm of potential debt, stress and loss of value. While GAP insurance, diligent record-keeping and proactive legal representation can help protect your finances, the best shield is education.
If you have recently been in an accident and are facing a financial shortfall between your vehicle’s value and your loan, it is recommended to reach out to attorneys experienced in these matters, such as the Milwaukee accident legal team–Gingras, Thomsen & Wachs.
