Do I need full coverage insurance to finance a car?

If you finance or lease your vehicle, you’ve probably asked yourself, “Do I need full coverage insurance to finance a car?” Yes, you need more than just a basic insurance policy.

Can you get a car on finance with insurance included? Learning what insurance you need to finance a vehicle is important. So, just what insurance is required when financing a vehicle?

The minimum insurance requirement for financed cars is full coverage auto insurance. Lenders and finance companies require you to maintain full coverage while financing or leasing a car.

How much is full coverage insurance? Average full coverage auto insurance costs $80 per month in the United States. When you buy a car, it’s important to budget for all of the costs associated with car ownership.

You may know the importance of comparing interest rates and negotiating the sales price of a car. Read on to learn how to find cheap auto insurance for a financed car.

Do I need full coverage auto insurance to finance a car?

The minimum insurance for financed cars is full coverage auto insurance. Why? Finance companies and lenders want to protect their assets. Therefore, credit acceptance insurance requirements say that the driver must have full coverage car insurance. If the coverage limits are too low, the finance company will put the car in force-placed insurance.

Read more: What are the average collateral insurance premiums?

Can I have liability insurance on a financed car?

Liability-only auto insurance on a financed car is not acceptable for lenders. That’s because liability car insurance only covers damage and injuries for the other driver.

Why do I need full coverage on a financed car?

Let’s say you get into an accident in a new car with liability-only insurance. Your auto insurance provider will only pay for damages and injuries to the other driver if you’re at fault. That means your vehicle won’t be covered, and you’ll still be on the hook to make payments on a damaged or total loss vehicle.

Therefore, you’ll need to have the minimum coverage for financed cars, which is full coverage. With no full coverage on a financed car, the finance company will place your vehicle under force-placed insurance.

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Your Lender Will Require Full Coverage Auto Insurance

Do I need full coverage to finance a car?

The state is concerned with the damage that you cause to others. If the state didn’t pass compulsory auto insurance laws, there would be no way to ensure that people could pay for their repairs and their medical treatment after they were a victim of a car accident.

While liability insurance is necessary, you need more than just that if you have an auto loan.

One of the terms that you agree to when you take out your auto loan is that you’ll buy full coverage insurance for the financed car. Full coverage auto insurance consists of comprehensive and collision coverage, and it protects the property that’s listed on the policy if it’s damaged.

What is auto insurance coverage required for a car loan?

Do you need full coverage on a new car? Your lender will probably make you buy coverage that includes liability, collision, and comprehensive.

• Many financial institutions require full coverage auto insurance before financing a car
• You will probably have to purchase an auto insurance policy that includes liability, collision, and comprehensive
• To find a cheap full coverage insurance policy for a financed car, you should use a comparison tool

When you finance a new car, you will need full coverage auto insurance.

The table below shows the average yearly rates for full coverage across the United States.

Auto Insurance Average Rates in the U.S.

When insurance agents and other drivers talk about full coverage auto insurance, they are referring to a policy that includes these types of auto insurance coverage:

• Liability coverage
• Comprehensive coverage
• Collision coverage

This type of full-featured policy protects you, whether you are at fault or someone else is at fault, in the case of an accident.

What are the common lender auto insurance requirements?

If you finance a car, what insurance do you need? Do you need full coverage when financing a car, or is basic coverage enough?

It would be best if you asked about lending requirements and auto loan insurance requirements before you enter into any financial contract. When you finance a car, you don’t hold the title until you pay the loan off.

The lender has a lien on the title until the loan balance is zero. While there is a lien on the title, the insurer is free to dictate how much insurance you must purchase.

Most conventional lenders require borrowers to purchase full coverage insurance on the vehicle while the lender is a co-owner of the car.

Full coverage insurance consists of physical damage coverage and the state’s minimum coverage requirements. Lessors may even require their borrowers to carry higher limits of liability for added protection.

Here’s what’s typically required for your car loan insurance requirements:

• Bodily Injury: Pays for third-party medical expenses when you are at fault in an accident that results in injury
• Property Damage: Pays for third-party property repair when you are at fault in an accident that results in damage
• Comprehensive: Pays for damage to the covered auto when it’s damaged due to a fire, theft, vandalism, explosion, or flood
• Collision: Pays for damage to the covered auto when you collide with another object

Keep in mind this is the minimum insurance for a financed car, and requirements may differ from one lender to another.

Auto insurance is not one size fits all. You will be able to choose the coverages that are right for you while still meeting your lender’s requirements. 

You might also be wondering: “Can someone else insure my financed car?”. Well, if your car is financed with a car loan, the lender will likely require the person who financed the car to be the policyholder on the car insurance policy.

What is the penalty for not carrying full coverage auto insurance?

Do I need insurance to finance a car? Can I get liability insurance on a financed car?

If you want to try and cheat the system, you should think again. Lenders must be listed as the loss payee on the policy.

When there’s a loss payee clause, the company must notify the lender when coverage expires, cancels, or renews. The lender will also be on the check when the payment of a claim is made.

If you fail to keep your insurance active, the lender can add force-placed insurance costs to the loan. The Consumer Financial Protection Bureau notes that this is a lot more expensive than a regular policy. This may even be applied to your loan so that you’ll end up paying it anyway.

Force-placed insurance doesn’t protect you in any way. If you want protection, you need to buy your standard, full-coverage car insurance. Since full coverage averages $80 per month in the United States, it’s important that you shop around.

Make sure you make a thorough rate comparison of your car loan insurance costs by entering your ZIP code into our free online quoting system.

The Reason for Full Coverage Auto Insurance

What insurance do you need to finance a car? If you have a car loan, full coverage insurance is likely required.

Finance companies want to protect their investment.

When you take out a loan to purchase a vehicle, the financial institution has a vested interest in your vehicle until you pay off your loan.

If you miss a payment or default on your loan, they have the option of repossessing the car and selling it to satisfy the terms of your loan.

If the vehicle is damaged at the time of the repossession, the finance company will incur the costs. Instead of risking this loss, the finance company wants to ensure you can cover this cost in the case of an accident.

We’ll discuss the three types of financed car insurance requirements these companies require:

Liability Auto Insurance

Can you have liability insurance on a financed car? To satisfy your state’s insurance laws requirements, you will need to purchase a policy that includes liability insurance.

Even vehicles that are paid off must have a minimum amount of liability coverage.

This policy pays for the damages caused by you if you hit another vehicle or damage someone else’s property with your vehicle. Liability insurance does not come with a deductible.

Collision Auto Insurance

Finance companies and lenders require collision auto insurance because it pays for the damage to your vehicle if you are the one who caused the accident.

If you hit another vehicle or damage your car by hitting an object, your collision policy pays for the damage to your car minus the amount of your deductible.

Comprehensive Auto Insurance

Your policy’s comprehensive auto insurance portion covers damage to your vehicle that did not occur while you were driving it.

Comprehensive claims include:

• Fire
• Theft
• Vandalism
• Certain types of weather-related damage

Comprehensive insurance for a car loan may or may not have an associated deductible.

GAP Auto Insurance

What is the difference between GAP insurance and full coverage auto insurance?

If you’ve financed a car and purchased GAP auto insurance with your contract, you might have assumed that you were paying for your insurance each time you paid your car note.

While this is a fair assumption to make, GAP insurance isn’t the same thing as standard auto insurance.

You still need a standard auto insurance policy when you buy supplemental coverage.

GAP insurance stands for Guaranteed Auto Protection. It’s a supplemental form of coverage that’s available to help protect you from financial loss if you total a car that’s being financed or leased.

The purpose of GAP coverage is to pay after the standard auto insurance pays out the car’s total value after a damage loss. As its name implies, GAP insurance is supposed to fill in the gap that’s present when you owe more than a car is worth.

To protect yourself, you may want to consider purchasing a GAP insurance policy along with your full coverage insurance policy.

GAP Insurance protects you against financial loss if you get into a car accident that results in your car being declared a total loss.

Is GAP insurance worth it for a new car? When you drive off the lot, your vehicle automatically loses some value. GAP coverage helps with covering that depreciation if you need to make a claim.

When a car is declared a total loss, the insurance company offers you the value of your car instead of replacing your vehicle.

If this amount is less than what you owe on your car loan, you will have to pay off the remainder of that money out of pocket. GAP insurance ensures that you are not paying thousands once your vehicle is totaled.

How to Find an Affordable Auto Insurance Policy

If you know you will finance a new car ahead of time, it is in your best interest to use a comparison tool to compare prices. See our article, How do I compare auto insurance quotes?

Different make and model years of the vehicle affect auto insurance costs. The insurance company assesses a risk factor for each class and year of the vehicle.

When it comes to insuring a new car, the price of your auto insurance policy is influenced by factors including:

• Safety features
• Safety record
• Horsepower
• Overall cost
• Likelihood of being stolen

One way you can mitigate that cost is by comparing quotes for the vehicles you are considering purchasing. Comparing quotes will help you determine if the car is affordable in the long run.

When you finance a car does it include insurance?

Most lenders require you to purchase full coverage for your car until you’ve paid off the loan.

• Do you need full coverage on a financed car? If you finance a car, you have to comply with the terms of the finance contract to avoid raising the balance of your auto loan
• When you’re borrowing from a lender to buy a car, you’re technically not the vehicle owner or titleholder until you’ve paid off your loan
• When you pay the auto loan off, you will receive a clear title
• Even though you don’t legally own the vehicle outright, it’s your duty as the registered owner of the car to maintain insurance on the vehicle
• The lender and the dealer will not provide coverage for the car once you take possession of it
• Not only does the borrower have to comply with auto insurance laws mandated by the state, but they also have to comply with the rules set forth by the lender
• Virtually all lenders require their borrowers to purchase full coverage that includes at least comprehensive and collision coverage.
• Many lenders will also limit the auto insurance deductible that you choose to $500 or lower to ensure that you can repair the car when it’s damaged.

When you buy a car, there are two ways that you can qualify for a loan. These two options are referred to as direct lending and dealership financing.

As a borrower, it’s up to you to decide if advance credit terms offered directly through the bank provide more of an advantage than the convenience that you can enjoy in the dealership finance office.

While the process of obtaining each loan is different, most loans that you secure directly from your bank or credit union have the same requirements and terms as the loans that you can select from the dealer.

One of the terms you have to comply with when you’re borrowing a great sum of money to buy a car involves insurance.

Is auto insurance included in your finance contract?

When you’re approved for a loan, the creditor will issue a statement that shows how much you’ll pay each month, how much you’re financing, what the Annual Percentage Rate is, the finance charge, and the total cost of all of the payments.

All of the charges will be found in the loan contract. If you decide to add extras like a warranty or GAP insurance sold in the finance office, the amount financed and total interest paid can change.

You must know that the contract won’t automatically provide you with insurance for the car. It’s your duty to buy auto insurance separately.

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Financing a Car Can Cost More Than Expected

When you get a good interest rate, financing your car purchase can make financial sense. After all, putting up $20,000 or more to buy a vehicle outright isn’t a feasible option for every consumer.

While financing is a good alternative, it might cost you more than you calculated in the dealership’s finance office.

One of the main reasons financing a car can cost you more than what’s laid out in your lending agreement is the lender’s insurance requirements. State requirements and lender requirements are very different.

The Federal Trade Commission notes that you should take a few steps before buying, like checking your credit score ahead of time.

When you get a car on finance, is insurance included? It would help if you bought a separate policy, and your lender will usually require that you have full coverage for the duration of the loan.

You must always have what’s required by the state, but you must have both state-mandated coverage limits and what’s required by the lender when you’re financing.

Can you select a high deductible for auto insurance?

Yes, you can find cheap auto insurance for a financed car. One way that you can save money on your auto insurance is by raising your deductibles. Unfortunately, this is a tactic that isn’t always useful when you’re financing.

Most finance companies limit how high your deductibles for comprehensive and collision can be. The purpose of the limit is to ensure that the property is repaired after a loss.

Most guidelines state that they can’t be higher than $500 without company approval. Approval for higher deductibles might be given on luxury cars or high loans where the borrower can afford $1,000 or $2,000 to cover damages.

If your deductible is too high, you will be penalized as if you don’t have insurance at all.

Can you choose any deductible for your auto insurance?

You have to have comprehensive and collision at all times, but you also have to comply with the deductible rules.

The deductible is the amount that has to be subtracted from your claim when it’s paid. Since carrying a high deductible can be a risk to the lender, it’s common for the loan contract to say that your deductible must be $500 or lower.

When you’re buying a car at a dealership, you have to budget for the monthly car payment and insurance expenses. Don’t overlook how much insurance rates can cost you over a year.

State Requirements for Auto Insurance

When a state has a mandatory auto insurance law, it’s the legal owner’s responsibility to comply with the law.

If you own the car outright, there’s no question who the legal owner is. When you’re financing a car, you don’t technically own the car until the loan balance reaches $0.

Even though you’re not the titleholder or owner of the car, it’s your duty to register the vehicle that you’re financing in your name.

The dealer will finance the car for you showing you as the registered owner. Since you’re the registered owner of the car, it’s your job to buy a minimum amount of mandatory coverage on your car so that you satisfy the law and avoid penalties.

You need to comply with state law to avoid being cited for a misdemeanor.

While coverage is required, not all coverage is mandatory. Each state has different coverage requirements based on the type of system.

Most of the minimum auto insurance requirements by state are a means to pay for others’ damages and not yours. Here’s what you’ll need to buy at the minimum:

• Bodily Injury
• Property Damage
• Personal Injury Protection (only required in no-fault states)

If you don’t meet your state’s minimum car insurance requirements, you can face fines, driver’s license suspension, and even jail time.

You can save on your monthly premiums by selecting liability insurance over full coverage. You should review your auto insurance contract every six months to make sure you aren’t paying for coverage that you don’t need.

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— AutoInsurance.org (@AutoInsurance) February 21, 2023

To find more affordable options, you can get online quotes from several companies at once. Use our online quote tool, enter your ZIP code, and start comparing the rates for various limits of auto insurance coverage right this very minute.

The Bottom Line: Do I need full coverage auto insurance to finance a car?

You now know that the answer to the question, “Do I need full coverage auto insurance to finance a car?” is yes. New and financed cars have higher cash values and require protection from disasters. You can receive cheap full coverage car insurance if you shop around. 

 

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