Best Practices: Dealing with an Auto Loan After a Total Loss

When one of your members experiences a total loss on their vehicle, it’s important to have a clear process in place to help reduce the administrative impact to the member as well as your staff and accounting department.  The following are CU Insurance Solutions’s best practices for dealing with an auto loan after a total loss.      


1. Freeze the Loan

Freezing the loan when the vehicle is declared a total loss will ‘stop the clock’ on the interest accruing on the loan daily.  If the loan is not frozen, the credit union will be charging the member for interest on a vehicle that is in process of a payoff settlement and no longer in use. Further, any interest accrued after the date of loss will later need to be ‘backed out’ for accounting purposes. If the unwinding of interest charges occurs after the loan is paid off, the difference will need to be re-allocated into the appropriate GL account.  This interest overage re-allocation will appear as a loss, even though it’s only figurative, it bears an additional accounting explanation.  Fundamentally, this administrative timing choice presents the question: Should we be requiring our members to pay an interest charge after being in an accident resulting in a total loss of their vehicle?


2. Guaranteed Asset Protection (GAP)

If the member purchased a GAP policy through the credit union, the GAP administrator will pay the difference between the amount that the member’s primary insurance carrier pays and the amount remaining on the loan at the credit union.  Some providers will also pay an additional benefit to help the member get into their next vehicle. Any additional benefit paid is made out to the credit union for applying it toward the principle of the next vehicle loan.


3. Vehicle Service Contract (VSC)

Some vehicle service contracts come with a “Total Loss Refund”, meaning the service provider will return 100% of the original cost of the contract in the event of a total loss. Sometimes, this still applies even if claims have been paid during the contract term.  Be sure to call the warranty provider to see if a refund may be available.


4. Credit Insurance/Debt Protection

In the event that a member purchased Credit Insurance/Debt Protection, be sure to note the cancellation so that the premium is not mistakenly remitted.  The member should still have elected coverage before the loan is converted to a personal status.

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