What high interest rates mean when clients’ cars get totalled

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Ongoing economic problems — including rising prices, high interest rates and stagnant wages — are creating problems for some insureds whose cars get totalled.

The situation’s most acute for clients who experienced financial problems during the pandemic and bought used vehicles after costs for new cars climbed out of reach, Jesica Ryzynski, a claims specialist with Mitch Insurance, observes.

“All of a sudden, I am getting a ton of calls regarding total loss offers for used vehicles,” she tells Canadian Underwriter. “Obviously [some of it is] people being upset with their settlements.

“However, financing appears to be another key issue. People are taking out high-interest loans on vehicles with really long amortization periods, so they end up with a very high loan on a vehicle that is absolutely not worth that much.”


Underwater car loans

If a client’s vehicle is totalled, the settlement an insurance company offers might not be enough to pay off the remaining balance of the client’s car loan.

“It’s become a bigger problem because of what we’re dealing with in this economy,” says Ryzynski. “Everything’s more expensive. People are maxing their credit cards. People are struggling financially. So, when their used vehicles die, and they can’t replace them, they’re often left with no options other than to take a high-interest loan on another used vehicle.”

Apart from saddling borrowers with high interest rates, the loan’s repayment terms can reach 15 years, meaning buyers can’t make headway in paying off the loan.

For example, Ryzynski had a client whose SUV from the early 2010s was totalled, leaving her with a loan payoff cost exceeding $20,000.

“That’s the kind of thing I’m seeing,” she says. “You can get a new car for that, but you can only get a new car if your credit is good. But this was a young person with small children and all of these inflationary issues in play. Those are the people who are getting hit.”


Compared to what?

Tight used-car inventories also mean clients who need to replace totalled vehicles with comparable pre-owned autos can’t find suitable replacements.

“In everybody’s mind, [there’s the idea that] if you have an accident and your vehicle is a total loss that it will be replaced,” says Ryzynski. “But it’s only replaced according to the market value of that vehicle at the time of the loss.”

And those market values can be hard to determine, because lower volumes of vehicle sales during the past three years has reduced the number of comparables available for pricing purposes – especially for older cars.

If an insured needs to replace a specific older make and model, there may not be comparables recent enough to account for post-pandemic inflation. This creates a mismatch between the insurer’s settlement offer and how much a client must spend to get back into a vehicle that meets their needs.

“When there are no [direct] comparables out there, they’re using comparables that might not be entirely current because it’s all that’s available. And then the insured is pointing out similar vehicles that are for sale online [for] $5,000 to $10,000 more [than the settlement offer]. However, it’s not the same vehicle,” says Ryzynski.

“It could be a vehicle that’s a different model, different trim, and so they’re comparing with [vehicle specs] that aren’t [entirely] alike.”


Soaring used car prices

An ongoing lack of inventory is inflating prices for used vehicles. Several adjusters with whom Ryzynski’s spoken have said her clients don’t realize the sticker prices they’re seeing online don’t accurately reflect the final sale prices for those used cars.

“That’s not what someone’s going to pay. They’re going to bring that down considerably. So it’s not a fair comparable,” she says.

“That lack of inventory is driving up asking prices and giving people unrealistic ideas of what their vehicle is now worth. The client has the option to provide three comparables for consideration but often none exist in their immediate area. The companies are very willing to review the comparables and have these discussions, but the issue is that so few seem to exist.”


Feature image by iStock.com/ftwitty

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