Since your car is technically your lender’s asset, it’ll typically require 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.
Do I need special coverage with a car loan or lease?
Yes, 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.
While you repay your car loan, your lender wants to be prepared for the chance that you default on your payments. When this happens, your loan provider 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.
What about leased cars?
Leasing a car is a bit different, of course. When you lease a car, the car is always the lender’s property until you’re given an option to purchase it. Leased cars are even more of a concern to lenders, so they’ll likely have stricter insurance requirements.
Why do I need extra insurance with a financed car?
Think of it as a down payment for a secured credit card. When a lender recognizes that there may be risks involved, it seeks security to protect its investment. A secured card’s security deposit removes the risk involved in lending money to someone who may not pay it back.
Another example is private mortgage insurance (PMI). Lenders require PMI when the borrower makes less than a 20% down payment. The added insurance protects the lender in the case of a foreclosure, much like a security deposit on a credit card or extra insurance coverage on a financed or leased car.
What kind of coverage 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.
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What is 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.
What are comprehensive and collision insurance?
Unlike liability insurance, comprehensive and collision insurance covers your own costs in the case of an accident or incident. 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.
Meanwhile, comprehensive coverage kicks in to cover vandalism, theft, and damage from hail, fire, flood and storms. It also pays when an object falls on your car and when you accidentally hit an animal.
What’s gap insurance and do I need it?
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.
Gap insurance covers the $5,000 left on 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 coverage 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 or loan matter?
Yes, in some ways, the type of car or loan does have an effect on your car insurance.
For example, 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.
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.
When do I need 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.
My car is paid off. Now what?
Once the loan is paid off, you can adjust your coverage. This decision comes down to the type of car you have and how much it’s worth. If you’re driving a new car, you may want to protect its value by continuing to pay for collision coverage. If you have an older or used car, consider dropping comprehensive coverage.
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.
- 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.
- Check your updated policy. Usually, insurers mail you an updated policy and terms.
- 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.
- Send or show the POI to your lender.
What happens if there’s a lapse in coverage 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.
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.