What is a Salvage Title, and Should You Avoid Them?

Shopping for a new car can feel like a daunting task. Although a car with a salvage title might seem like a good deal, it comes with some risks. To understand the risks, potential car buyers need to be aware of what a car title is. A car title is a legal document that proves who owns a car. A clean title indicates the car has not sustained major damage (although it may have had minor damage). In comparison, a salvage title is a special type of car title that also documents that the car is damaged beyond its fair market value. This means that the vehicle is so badly damaged that repairing it would likely cost more than the car is worth.

A salvage title should be considered a major red flag for potential buyers when car shopping. Usually, vehicles with salvage titles cannot be legally operated on public roadways. Getting the title status changed to a rebuilt salvage title is possible, but the owners will likely have difficulty getting the salvaged car insured.

Salvage titles are generally issued after a vehicle has been declared a total loss by an insurance company. Essentially, giving a car a salvage title is a form of financial protection for insurance companies and everyday drivers. After an accident results in a car needing to be salvaged, the insurance company will give the vehicle’s owner a payout settlement of the car’s fair market value. The insurance company will then take ownership of the remains of the vehicle via the new salvage title.

If the salvaged vehicle has some sentimental value, the owner can usually request to keep the vehicle. However, the vehicle’s estimated fair market value based on the new salvage status will usually be deducted from the payout amount. In essence, the owner is buying their car back from the insurance company.

Alternatively, if an uninsured vehicle owner is in a serious accident, it is generally their responsibility to apply for a salvage title from their state’s Department of Motor Vehicles.

Any source of significant damage can result in an insurance company giving the car a salvage title. Although many may immediately assume the major damage was from a car accident, it could be from severe weather, such as hail storms or hurricanes.

A salvage title vehicle may only be suffering from cosmetic damage, but its total loss designation by the insurance company is why it was given a salvage title. By becoming a total loss, it no longer makes financial sense for the insurance company to cover the vehicle. Even when a car is completely safe and operational, it may still be given a salvage title.

When the extensive damage to a salvage vehicle is strictly cosmetic or after it has been safely repaired, the vehicle’s owner can try to have the title changed. For example, in California, salvage title vehicle owners can apply for what is known as a revived salvage title. Changing the title status will require that the damaged vehicle be repaired to meet specific safety standards.

The specifics of title status can vary wildly depending on your state. In some states, if a vehicle is given a junk title status, the car must be dismantled and only used for spare parts. In other states, such as California, if the vehicle can be rebuilt to a level that passes the necessary state inspection standards, it can be legally operated on public roadways. But only after it is officially given a rebuilt title status.

Suppose you are considering buying a salvage title vehicle. In that case, it is important to remember that, in most cases, a salvage title legally prevents the vehicle from being driven on public roadways. A trusted mechanic may be able to estimate the potential repair costs. But a car with a salvage title is probably not the best choice for someone in the market for their everyday vehicle.

Car buyers who find a salvage vehicle that interests them will then have to decide if the car is the right personal finance decision for them. The upfront cost of the vehicle is usually the smallest financial hurdle when it comes to a salvage title car. Once a vehicle has been given a salvage title, the industry rule of thumb is to deduct 20% to 40% of the Kelley Blue Book value. However, to get an accurate valuation of a salvage title car, it would be best to have the vehicle inspected by a trusted mechanic or expert.

Since salvage title cars are generally viewed as a liability, it may be difficult to qualify for a personal loan to finance the car. Since getting a car loan may be difficult, salvage vehicles are often just sold at auction to the highest cash bidder.

After an insurance company deems a vehicle a total loss, it will also likely be difficult to get appropriate insurance coverage. Even after the motor vehicle meets the applicable safety standards and has its title designation changed, car insurance can still be an issue. Anything other than a clean title will indicate there was serious damage in the car’s history. It is also worth remembering that once a vehicle has a rebuilt status, some insurance companies will only offer liability coverage. So they probably won’t cover any future damage to the car.

Finally, even if a car is properly repaired and given a rebuilt vehicle title, it may be difficult to sell privately. Many dealers will only accept trade-ins of clean title vehicles.

If you are in the market for a new vehicle, use our tool to compare different auto loan providers. You may qualify for more than you expect, meaning you can begin to consider cars you didn’t know you could afford.