If your car is damaged beyond repair in an accident, the insurance company of the liable party generally offers to compensate you according to the fair market value of the vehicle. This may not be equivalent to the amount outstanding on your car loan, so you owe the bank or institution holding your car title more than the amount the insurance company is paying you. Instead of paying off part of your outstanding car loan and finding additional funds needed to lift the lien on the vehicle, you can suggest a substitution of collateral. In simple terms, this means that you use the money received from the insurance company to purchase a vehicle similar in value to the one that was destroyed, and ask the bank or loan company to accept an exchange of the title of the original vehicle for the title of the new one. If the lender agrees, a lien similar to that on the original vehicle is placed on your new one, and the title of the wrecked vehicle passes to the insurance company. This course of action requires that all the parties involved, including the bank or loan company, the insurance company, and the dealer selling your new vehicle, agree to the substitution. The procedure is not unusual and can often be arranged without undue difficulty. For more information about substituting collateral, contact an attorney.
