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How financing a car affects your car insurance

To protect your lender's investment, you may need extra coverage.

If you’re financing a new or used car, your lender likely has its own set of car insurance requirements to factor in to your policy. It makes sense: The car is technically your lender’s asset, so it wants to protect its investment. But the good news is that once your loan is paid off, you’re free to adjust your coverage within your state’s legal limits.

What kind of car insurance do I need with a financed car?

While most states require liability insurance at the very least, many lenders and leasing companies ask you to add collision and comprehensive coverage to your policy. The combination of the three types of protection is called full coverage car insurance. On top of this, you might also be asked to add gap insurance to your policy.

Specific coverage amounts vary depending on the provider you use to finance or lease your car. Speak with the company directly to find out exactly what types of insurance you’re required to have before comparing insurance providers.

  • Liability insurance. Liability insurance is legally required in most states and covers the costs of injuries and property damage to other parties during an accident you’re at fault for.
  • Collision coverage. Collision insurance covers the cost to repair or replace your vehicle in the case of an accident with another vehicle or object, like hitting a pothole, tree or guardrail.
  • Comprehensive coverage. This kicks in to cover vandalism, theft, and damage from hail, fire, flood and storms. It also pays if an object falls on your car or you accidentally hit an animal.
  • Gap insurance. Gap coverage isn’t required but it protects you when your car’s totaled and you owe more on your car loan than your car is worth.

What kind of car insurance do I need with a leased car?

Leasing a car will have similar insurance requirements as a car with a loan. When you lease a car, the car is always the lender’s property until you’re given an option to purchase it. Common coverage your lender might require:

  • Liability insurance. Leased cars are typically required to have higher maximums around $100,000/$300,000 bodily injury liability and $50,000 property damage liability.
  • Collision coverage. Covers damage to the leased car in an accident with another car.
  • Comprehensive coverage. Covers any other non-collision damage to your leased car.

Leased car insurance requirements

When leasing your car directly through the manufacturer, you’ll typically need full coverage car insurance, which includes liability, collision and comprehensive coverage. For example, both Acura and Honda require:

  • Acura lease requirements: Physical damage, comprehensive, collision
  • Honda lease requirements: Physical damage, comprehensive, collision

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Why do I need special coverage with a car loan or lease?

You’ll need to meet certain car insurance requirements set by your lender if you’re financing or leasing your car. Think of it as a form of collateral to give the lender security if anything happens to your vehicle.

Financed cars are even more of a concern to lenders, so they’ll likely have stricter insurance requirements. You might have to add your lender as an additional insured, which will prove your continued insurance status to your lender. This is common in other forms of insurance as well, such as adding your landlord as an additional insured to prove you have renters insurance.

In addition, a lender wants to be prepared for the chance that you default on your payments for a car loan. When this happens, your lender takes possession of your car and likely resells it to recoup the losses. The better condition your car is in, thanks in part to your insurance coverage, the higher resale value your lender gets to cover its losses.

Why do I need gap insurance for a loaned car?

Guaranteed auto protection, or gap insurance, is designed to cover the gap between your vehicle’s actual cash value (ACV) and the amount of money you owe on it. The ACV is determined by the value of the car at the time of the accident or incident.

This coverage comes in handy if your car is stolen or totaled and you owe more on your loan than the car’s worth. It ensures you won’t have to pay an outrageous amount of money out of pocket to cover the gap between what your insurer will pay for your car’s ACV and what you still owe to your lender.

Depending on your lender or leasing company, you may not be required to add gap insurance to your policy, though it’s usually a smart investment to consider.

Case study: Gap insurance covers Cory’s loan after his car is totaled

Cory is involved in an accident and is found not at fault. Luckily, his accident is covered by his car insurance policy. At the time of the accident, Cory’s car is worth $10,000, but he still owes $15,000 on his car loan.

Because Cory has gap insurance, his insurance company covers the $5,000 gap between his car’s ACV and the remaining balance of his loan. Without gap insurance, he would have paid this $5,000 gap himself.

How much does car insurance cost for a financed car?

Adding gap coverage to your policy is often relatively inexpensive, at an average of $20 to $30 per year. The cost of collision and comprehensive coverage varies depending on where you live, your driver profile, your deductible and your driving record.

Because leasing companies often require more coverage, you can likely expect to pay more for insurance in these circumstances. The median annual rate increase for adding both collision and comprehensive to your policy is around $600. Adding collision coverage could increase your premium by anywhere from a couple hundred dollars to more than $1,000, and comprehensive coverage may increase your premium by $100 to $200.

Ultimately, there are a lot of factors that contribute to how much your insurance policy costs. Because of this, it’s best to compare quotes from a few different providers to get an accurate idea of how much you can expect to pay.

Does the type of car matter?

Yes. New and used cars may also have varying insurance costs. While you might expect new cars to have more costly premiums, there are actually many things that decrease the rates for these vehicles. New cars are typically fitted with additional safety features that could potentially decrease the damage done to you and your car in an accident. This could help lower your premiums, since less damage in an accident means less money your insurer has to pay out in a claim.

Used cars, on the other hand, are more likely to be stolen thanks to the demand for and versatility of their parts. This can drive up insurance rates to protect against the possibility of theft.

Does the type of loan matter?

Taking out an unsecured personal loan instead of an auto loan helps you avoid requirements set in place by lending companies when your car is used as collateral. This allows you to choose your own coverage options to meet your own budget and preferences.

How long do I have to purchase extra coverage?

You usually have anywhere from four to 30 days to inform your car insurance company that you changed vehicles. Then you can change any coverage levels for your new wheels.

You’ll typically need to be covered before you drive off in your new or new-to-you car. If you don’t already have insurance, start shopping for insurance quotes before you get your auto loan or lease. That way, you’ll know what you’ll pay each month for insurance on top of your loan. You can then balance your loan payments accordingly.

How do I prove coverage to my lender?

To prove to your lender that you’re insured, follow these general steps. Your lender might have more specific requirements.

  1. Add your lender to your car insurance policy as a loss payee, or someone who will receive a payout if your car is a total loss.
  2. Check your updated policy. Usually, insurers mail you an updated policy and terms.
  3. Ask your insurer for proof of insurance (POI). In most cases, this will be an authentic document from the insurer listing your policy information, payees, coverage level and effective dates.
  4. Send or show the POI to your lender.

What happens if there’s a coverage lapse for a financed car?

There is a clause in your paperwork that spells out what will happen if you let your car insurance lapse. In most cases, lenders purchase a policy for your car, which is technically their asset, and charge you for it. This is called force-placed insurance, and it’s usually three to five times more expensive than a normal policy.

Along with being significantly expensive, force-placed insurance also tends to offer reduced coverage levels and usually doesn’t include bodily or property liability coverage. That means if you injure someone or damage a car, you won’t be covered. If you live in a state where that coverage is mandated, you may face additional penalties if you’re caught driving without that coverage.

If you fail to pay the force-placed policy, the lender will most likely repossess your car.

The upside is that if you can prove to your lender that you’ve purchased your own policy, they have to remove the force-placed insurance. Most states only allow insurers to collect force-placed premiums for the days you’re uninsured and nothing more. So if you were uninsured for three days, you should only be billed for three days’ worth of premiums.

How do I compare coverage for a financed car?

To get the best possible deal on full coverage insurance for a financed car, try these tips.

  • Look for providers that offer new car protection. This kind of coverage is great for a new car loan, since it offers some of the same benefits as gap insurance. If your car is totaled, you can get a brand-new replacement.
  • Compare providers. Rates change all the time, and loyalty doesn’t always pay as much as changing providers. You can often save simply by switching insurance companies.
  • Ask about discounts. You may be eligible for a discount for driving a new car, extra vehicle safety features, paying up front, being a safe driver and more.
  • Choose your deductible carefully. The higher your deductible, the lower your premium. Pick a deductible you can afford to pay after an accident.
  • Combine policies with your spouse. Since studies show that married drivers file fewer claims, you could save by bundling your car insurance with your husband or wife.

Bottom line

When you finance or lease a car, be prepared to add to your insurance costs. Since your car is technically your lender’s asset, it’ll typically require full coverage insurance. This protection comes at a cost, so you’ll want to factor that in when you’re shopping around for both your new wheels and your new policy.

To squeeze the most value out of your policy for any car, be sure to compare car insurance providers.

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