I am on the verge of defaulting on my auto loan. I have come to terms with that. Now, I was in an accident (the other drivers fault). Their insurance is sending payment to get it fixed. If I get it fixed, which will take the whole amount they are sending, I will still be defaulting on the loan and losing the car. Is it illegal to turn in the car in its wrecked state and use the insurance money on another vehicle?

Welcome to AMHD. You probably have a contractual duty in the financing contract to apply all insurance proceeds to the repair of the car, regardless of whether you are in default. Your best course may be to sell it before it is repo'd. The lender will probably sell it for half what it is worth and expect you to pay the other half.

Yes it will be illegal to do this. And normally the check will either be to you and the lender and/or also it will be written to you and the auto repair shop

Yes. It is illegal.

Turning the car in HAS to be your last resort, especially now that it has been wrecked.

Get it fixed, try to find a buyer who will trust you to pay off the loan and obtain the title AFTER they have given you the money.

If you turn in the car, it must be sold at an auction, and it must be flagged as a repossessed vehicle when it runs through the block.

This means it will bring only a fraction of what it is worth, and you will still be responsible for the balance after the proceeds are applied from the sale.

As an example, if your loan balance is say $10,000 and the vehicle brings $2,000 at the auction, the lender is going to add the cost of the repossession (yes, there will be costs applied even if you give it back) any charges for cleaning and reconditioning prior to taking it to auction, and any fees related to the sale.

$10,000 minus $2,000 plus the recovery and recondition fees, say $650, would mean you still owe them $8,650 and you have no car.