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CAR INSURANCE INSIGHTS

When financing a car, you will need to show the lender proof of full coverage. Keep reading to learn everything you need to know about insurance coverage on a financed car.

Buying a new car can be a thrilling experience. But you must protect the new vehicle, and that means buying auto insurance. And because auto insurance can be such a substantial cost, we recommend looking into insurance costs before deciding on a vehicle.

When you are financing a car, the odds are good that you will need full coverage car insurance, including comprehensive and collision insurance. If you buy a car in cash, you can probably get by with less coverage, even though that might not be a wise decision.

Wondering what insurance is required for a financed car? Read on to learn more about the right way to insure a financed vehicle.

KEY TAKEAWAYS
  • Most lenders will require comprehensive and collision, liability and uninsured and underinsured motorist coverage.
  • Dropping coverage on a financed vehicle is a mistake and can result in costly force-placed insurance put into place by your lender.
  • When buying a new (or used) vehicle, consider the insurance costs for that vehicle before making a final purchasing decision.
  • Shop around and compare quotes with different insurance companies to find the best coverage for the best price.

What does financing a car mean?

How does financing a car work? Basically, it involves a bank – or another lender, such as a car dealership -- loaning you money to complete the car purchase.

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.

What is the difference between leasing and financing a car? When leasing, you do not purchase the car. Instead, you pay for the right to use the car for a certain period and number of miles.

Does financing a car affect your car insurance?

Financed car insurance requirements might differ from the requirements you would face if you bought the car with cash. As a general rule, most state laws require that you purchase liability car insurance that covers you if you injure another person or damage or destroy someone's property.

Many state laws do not require you to have coverage beyond a certain minimum amount of liability protection.

However, if you finance a car purchase, minimum insurance for a financed car is almost certain to go beyond liability coverage. Instead, you will be required to purchase additional forms of auto insurance coverage.

When you finance a car, you take out a loan to complete the purchase. This means that damage to your car is a risk not only for you but also for your insurance company. If you cannot pay out of pocket to repair the car, the lender could be at risk for a financial loss.

As a result, your insurer probably will require you to carry full car insurance coverage. That way, if your car is damaged, the insurer will pay to repair the damages. In addition to liability coverage, the lender might require you to purchase:

What type of auto insurance is needed when you have a lien or loan on your car?

As mentioned above, your lender likely will require you to purchase coverage beyond liability car insurance. Additional coverages you might need to purchase include:

Collision coverage

This auto insurance coverage protects you when your vehicle is damaged after a collision with another car or object or if the car flips over. Pothole damage also falls under this type of coverage.

Comprehensive coverage

This coverage protects your vehicle when damages occur that result from something other than a collision with a car or an object. Examples of damages covered under comprehensive are:

  • Fire
  • Falling objects
  • Missiles
  • Explosions
  • Earthquakes
  • Windstorms
  • Hail
  • Flood
  • Vandalism
  • Riots
  • Contact with animals

Bodily injury liability coverage

This coverage protects you if you are responsible for injuries to someone else. It is especially helpful if you are responsible for an accident that causes severe injuries and results in your being sued. 

Underinsured and uninsured motorist coverage

This coverage protects you and your loved ones if another driver is responsible for injuries or damages to you, but the driver does not have sufficient insurance to cover your loss. You also can tap this coverage if you are hit as a pedestrian.

Gap insurance

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.

If you badly damage or total your car, gap insurance will cover the difference between what the vehicle is worth and the amount you owe on the car loan.

All of these additional coverages can make your auto insurance policy more expensive. To estimate how much you might have to pay, use the Insurance.com Car Insurance Coverage Calculator.

Do I need full coverage on a financed car?

The concept of “full coverage” is a bit of a misnomer. You cannot purchase a “full coverage” policy.

However, the term is often used as shorthand for coverage that goes well beyond the minimum liability coverage required by state laws. It includes coverages such as:

  • Liability insurance
  • Comprehensive and collision coverage
  • Uninsured and underinsured motorist coverage
  • Personal injury protection
  • Rental reimbursement coverage

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

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 which does not cover you -- will be added to your loan payments.

Ways to save when financing a car

When insuring a financed car, it always pays to shop around. Each car insurance company has its own formulas for setting rates, and some insurers will likely serve your needs much better than others.

So, make sure you shop around and compare rates.

In addition, there are many ways to get extra car insurance discounts that can trim your cost of coverage. For example, you may receive price breaks for taking a defensive driving class, being a homeowner or bundling your policy, among many others.

Another proactive way to save is to consider the insurance costs of different makes and models before deciding on a vehicle.

"Auto insurance costs for a Chrysler Voyager will be dramatically different than insurance costs for a Maserati," says Ashlee Tilford, Insurance.com managing editor. "Chances are if you're eyeing a Maserati you won't be happy to purchase a Voyager, instead, but there are other higher-end vehicle options with lower insurance costs."

While you may not want insurance cost to be a determining factor in your purchase decision, if the auto insurance for a particular vehicle throws you out of budget, you may need to reconsider.

Frequently asked questions

Is car insurance more expensive for a financed car?

All things being equal, the cost to cover a car that is financed and one that is bought with cash should be roughly the same. Financing a car does not increase your car insurance cost in and of itself.

However, your lender will likely require you to carry coverages – such as comprehensive and collision – that you might opt not to purchase if you buy a car with cash. In that sense, it is possible that financing a car could force you to pay a bit more in auto insurance costs.

Can I get liability insurance on a financed car?

Not only can you get liability insurance on a financed car, but you must carry a minimum amount of such coverage according to the law in your state. However, it is unlikely you can only carry liability insurance on a financed car.

Do I need gap insurance on a financed car?

The value of gap insurance is going to differ from driver to driver. Everyone needs to make their own decision about whether this coverage makes sense for their situation.

Having said that, purchasing gap insurance can be a wise decision for drivers who have financed a car that is depreciating quickly, and that may be worth less than what the policyholder actually owes on the car loan.

What happens if I drop auto insurance on a car that is financed?

Since your lender is a lienholder on your vehicle, they will be listed on your auto insurance policy and will be notified if the policy has been canceled. The lender will then have the right to force-placed insurance which protects their asset. However, force-placed insurance is often costly and will be billed to you.

Do not drop insurance coverage on a financed car. If you accidentally miss a payment and your insurance is canceled, call your insurer immediately to pay. Then call your lender to let them know what happened and that you resolved the issue.

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