Do I need full coverage on a financed car?

Do you need full coverage on a financed car?

Yes, you need full coverage on a financed car because it's part of your loan agreement. Your lender will require you to carry comprehensive coverageComprehensive coverage helps pay for damage to your car caused by events other than a collision, such as theft, fire, vandalism, or natural disasters. It is subject to a deductible. as well as collision coverageCollision coverage helps pay for repairs or replacement of your car if it's damaged in an accident, regardless of who is at fault and is subject to a deductible. to protect its investment in your vehicle.

If something happens to your vehicle while the lender still has a stake in it, you're expected to repair it to maintain its value. To ensure you can afford to do that, the loan agreement requires full coverage insurance, or, more specifically, collision and comprehensive insurance. Until you pay off your loan balance, you'll be required to continue carrying full coverage.

When financing a car, what insurance do I need?

For a loan, you'll need to carry more than the state minimum. You will need full coverage auto insurance, which includes liability insurance, anything else required by law (in some states that includes personal injury protectionPersonal injury protection (PIP) pays for your medical, hospital and funeral expenses resulting from a car accident, regardless of who's at fault. and uninsured motorist coverage), and:

Collision coverage. This auto insurance coverage protects you when your vehicle is damaged after a collision, regardless of fault in the accident.
Comprehensive coverage. This coverage protects your vehicle when damages occur from something other than a collision with a car or an object. Examples of damages covered by comprehensive insurance are weather damage and vandalism.

Can I get liability-only insurance on a financed car?

No, you can't carry a liability-only insurance policy if your car is financed. Your lender will require you to carry comprehensive and collision coverage.

A liability-only policy meets state legal minimum coverage requirements, but provides no protection for the vehicle itself. When you finance a car, you sign an agreement with the lender that requires you to protect the car, because it's collateral for the loan. A liability-only insurance policy doesn't meet that requirement.

What does financing a car mean?

Financing a car means that you are borrowing money to buy the car. When financing a car, you typically can choose between:

Direct financing: This is where you borrow from a bank, finance company or credit union
Dealership financing: This is where you borrow through the car dealership that sells you a vehicle.

Financing a car involves agreeing to pay back your car loan over a specified period.

People ask

Is insurance more expensive for a financed car?

No, insurance isn't more expensive if your car is financed. However, since you full coverage costs more due to the addition of collision and comprehensive insurance, you may find your insurance premiums go up if you previously carried liability-only.

How does financing a car affect your car insurance?

Financed car insurance requirements are different from a car you own outright.

When you finance a car the lender has a financial stake in that vehicle. This means that damage to your car is a risk not only for you but also for your finance company. If you can't pay out of pocket to repair the car or pay off the loan if it's totaled, the lender will lose money.

As a result, your loan agreement will require you to carry full coverage insurance. That way, if your car is damaged, the insurer will pay to repair the damages or pay the lender if the car is a total loss.

Your lender will be named as a loss payee on your insurance policy, protecting their investment. This means the insurance company will pay the lender first if your car is a total loss to pay the loan.

What happens if you don’t have full coverage on a financed car?

If you drop insurance on a financed car, your lender will be notified by the insurance company. Dropping full coverage on a financed car is a big mistake. Doing so is a violation of your finance contract, possibly placing your car loan in jeopardy.

In some cases, the lender will purchase what is known as force-placed insurance to make sure the car is covered. The fee for this coverage, which is very expensive and protects only the lender will be added to your loan payments.

Furthermore, if your car is damaged in an at-fault accident, you will have to pay for all repairs yourself; the insurance company will not cover anything. And, if the car is a total loss, you will not only have no coverage for the car itself, but will still have to pay off your loan. So, while coverage costs are higher, the cost of not having it would be much worse.

What is gap insurance and do I need it?

After you buy a new car, the value of the vehicle immediately begins to drop. This depreciation can cause a problem if the value of your loan exceeds the vehicle's market value. Insurance will only pay the actual cash value of the car, regardless of your loan balance.

If you badly damage or total your car, gap insurance will cover the difference between the actual cash value of the vehicle and the amount you owe on the car loan.

Gap insurance is not usually a requirement, but it might be in some cases.

How to save on insurance for a financed car

You can get cheaper full coverage insurance for your financed car with a few tips:

First, make sure you shop around and compare rates. It's a good idea to spend some time doing this before you buy a car, and consider the insurance costs of different makes and models before deciding on a vehicle.
Ask about car insurance discounts. For example, you may receive price breaks for taking a defensive driving class, being a homeowner or bundling your policy, among many others.
Consider usage-based insurance. Programs that track your driving habits and reward you for safe driving can bring down your rates.
Raise your deductibles. A higher deductible means a lower rate; just be sure to choose one you can afford.