Suppose your car is ruined in an accident, but the loan balance you have with the finance company or bank for purchase of the car is higher than the assessed market value of the car you are eligible to collect from the insurance company. In this case, after receiving the money for the market value of the car, you would still owe on the loan for a car you no longer have.
A better solution might be to substitute collateral. This enables you to use the reimbursement money to buy a substantially similar car and substitute its title for the one the bank is currently holding. The bank gets new collateral for your loan – your new car – which is worth roughly the same amount as the old collateral.
You get a substantially similar vehicle in working condition. The insurer takes the title for the wrecked car from the bank. This is a relatively simple procedure. All the parties involved, including you, the insurance company, the used car dealer and the loan company, have to be in agreement, and your efforts have to be coordinated.