Insights:

You must carry full auto insurance coverage on a financed vehicle. 

Buying a new or used vehicle often involves taking out a loan to help finance the purchase. Whenever you finance a car, the bank or other lender will require that you carry a certain amount of insurance to protect their investment in your car.

Insurance requirements for financed vehicles include carrying full coverage, including collision and comprehensive coverage. This protection ensures that your auto insurance company reimburses the lender if the car is destroyed in an accident or by another covered peril.

Keep reading to learn everything you need to know about car insurance and financed vehicles.

Key Takeaways

  • You need full coverage on a financed vehicle, including collision, comprehensive, liability, uninsured and possibly gap insurance.
  • If you don’t have enough car insurance on your vehicle, your lender won’t likely approve the loan.
  • Insuring a financed car doesn’t cost any more than covering a vehicle that you own outright.
  • Once you pay off your car, you can drop parts of the full coverage, though it’s often wise to keep auto insurance protection.

What does financing a car mean?

Financing a car simply means that you took out an auto loan to pay for it. If you can’t afford to pay cash for your new ride, you need to borrow the money to pay for it. In most cases, you can take out a car loan from a bank or the dealership to cover the cost of the vehicle.

Since the bank or dealership has lent you the money to purchase the car, they technically own the car until you pay them back, in most cases, with interest. While some automakers offer interest-free loans on occasion, drivers generally pay interest on the borrowed money.

Here are a few terms you may need to know when dealing with a dealership or bank loan:

  • Loan principal: This is the amount you borrow to purchase the vehicle. In most cases, you need to make a down payment. The amount of your down payment varies by your loan requirements.
  • Interest rate: The interest rate is the interest percentage that you pay back in addition to the loan principal. Interest rates can vary dramatically depending on your credit score, down payment amount and other personal factors.
  • Loan term: This refers to the length of the loan. Car loans typically run from three to seven years, depending on the vehicle.

Since the bank or dealership technically owns the car, they want to protect their investment. That’s why lenders usually require you to carry full coverage car insurance.

Once you pay off your loan in full, the car is officially yours and the bank or dealership sends you the title.

Do you need full coverage on a financed car?

Your lender usually requires full coverage car insurance on the vehicle they have financed. 

This helps protect their investment in your car. They want to be confident that if it is damaged or destroyed in an accident or by another peril, that the vehicle will be repaired, or they will be reimbursed the money they are owed if it is destroyed.

Full coverage consists of the following coverages:

Liability

Liability insurance helps pay for damage that you cause to other people, another vehicle or property with your car. The bodily injury portion of liability covers medical and legal bills if you’re responsible for an accident. The property damage section covers the cost to repair another person's car or property that you damage with your vehicle. Liability doesn’t pay to repair your vehicle.

Collision

Collision insurance pays to repair or replace your vehicle after it’s damaged due to a collision. This is the coverage that repairs your car after an accident. Your lender requires this coverage, so they’re confident the vehicle will be repaired or they will be paid out if it is destroyed in an accident.

Comprehensive

An accident is not the only thing that can damage or destroy a vehicle. Weather, fire, vandalism, animal strikes, and even flood damage are covered by comprehensive coverage. Your lender also requires this coverage, so they know the car will be repaired or replaced if it’s damaged by the perils covered under comprehensive.

Uninsured motorist

This coverage helps cover the cost to repair your vehicle if it’s damaged by an uninsured or underinsured motorist.

Gap insurance

If you financed your vehicle via a lease, your lender will most likely require Gap insurance. Gap insurance covers the difference between your car loan or remaining lease payments and the actual cash value of your vehicle.

A new car loses 15% of its value as soon as you drive it off the lot. Unfortunately, if your vehicle is destroyed in an accident in the first couple of years, there’s a good chance you will owe more on the loan or lease than the vehicle is worth. Gap insurance pays this difference, which is why your lender will often require this coverage.

What coverage do you need for a financed car?

We reviewed the various coverages you need to carry with a financed vehicle, but you need to decide on coverage levels as well. 

Liability

Technically, your lender is probably not going to insist on certain coverage levels for liability as it doesn't directly impact them. Liability only covers damage you do to other people and their property. However, liability coverage is required in just about every state in the country, minimum liability requirements vary by state. Carrying the state minimum coverage is never enough coverage. Most experts recommend having at least 100/300/50 which is $100,000 per person and $300,000 per accident in bodily injury coverage, and $50,000 in property damage liability.

Comprehensive

Comprehensive insurance only requires you to choose a deductible. You don’t need to select coverage levels. Comprehensive pays to repair or replace your vehicle when it’s damaged by something other than a collision. Always choose a deductible you can easily afford if you have to make a claim.

Collision

You only need to choose a deductible for collision coverage. Collision pays to repair or replace your vehicle if it’s damaged in a collision.

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

In almost all cases, you can’t drive the vehicle off the lot or get your loan approved until you provide proof of full coverage insurance. In addition, most lenders require that they’re listed as a loss payee on the policy, which means that they would be notified if the policy is canceled, lapses, or is non-renewed.

Once the lender is aware that you’re no longer insuring the vehicle, they will put an insurance policy in place and bill you for it. This is called forced placed insurance and, in most cases, it’s dramatically more expensive than a normal policy.

Can you get liability insurance on a financed car?

Yes, in fact, you have to carry liability coverage to be legal out on the road, regardless of whether your vehicle is financed or you own it outright, in most states.

The required amount varies by state and can range from a low of $10,000 up to $50,000. While you can get liability on a financed car, it won't be the only coverage you need. Your lender almost always requires drivers to carry full coverage on the vehicle.

What's the difference between leasing and financing a car?

There are several differences between leasing and financing a vehicle. Here are a few of the major differences:

Leasing a vehicle

  • Ownership: Leasing is comparable to renting a car long-term. You make monthly payments over a certain amount of time and then the vehicle must be returned to the dealer. However, there is the possibility of buying the car at the end of the lease if you desire.
  • Payments: While it can vary between vehicles, lease payments generally tend to be lower than the payments for a financed car. This is because you’re not financing the value of the car but the depreciation that occurs over the period you’re driving it.
  • Mileage: Leases come with mileage caps. It varies by lease, but in most cases, it’s limited to 12,000 miles a year. You can purchase additional mileage, but it tends to be expensive.
  • Wear and tear: There can be additional charges at the end of the lease if there’s more than the standard amount of wear and tear.

Financing a vehicle

  • Ownership: When you finance a vehicle, you’re simply using a bank loan to help you purchase the car. At the end of the loan term, you own the vehicle outright.
  • Payments: Finance payments tend to be higher than a lease payment as you’re purchasing the entire vehicle. Once you make all of the payments, the vehicle is yours.
  • Mileage: You can put as many miles as you want on a financed vehicle.
  • Wear and tear: There are no charges for wear and tear on a financed car.

How to save money on auto insurance when financing a car

Whether you’re driving a financed vehicle or one you own outright, saving money on your insurance premium is always good. 

Here are a few tips to help keep your premium affordable:

Shop around

This is probably the best way to lower your auto insurance premium. Insurers rate risk differently. That can result in dramatic differences in premium quotes. Shop at least five different insurance companies and make sure you’re comparing apples to apples when it comes to coverage levels and deductibles.

Raise your deductible

An insurance provider loves it when you have more skin in the game so raising your deductible always lowers your premium. If you can afford to double your deductible, you should see a significant price drop. Make sure you always choose a deductible that you can easily afford in case you need to make a claim later. 

Discounts

Insurers offer tons of discounts, so make sure you’re getting every discount you are qualified to receive. Ask your insurance company to do a discount review to make sure all available discounts are being applied to your auto insurance policy.

Improve your credit score

While this tip can take some time and effort, it can result in a lower car insurance premium. An insurance company may factor in your credit score when setting a premium, so the better your credit score, the lower your premium.

Frequently Asked Questions

Can a financed car be insured by someone else?

In most cases, the answer is no, but there can be a few circumstances where it might be allowed. Typically, the lender requires the insurance for the vehicle to be in the name of the person taking out the loan.

When it comes to auto insurance, the policyholder must have an insurable interest in the vehicle, which means anyone on the policy must have a financial stake in the vehicle. If you plan on having another person insure your financed vehicle, you most likely have to add them as a co-signer to your loan.

Is insurance more expensive for financed vehicles?

No, your insurance will not be more expensive for a financed vehicle. Insurance rates consider many factors, but whether the car is financed or leased isn’t a factor that will impact your premium.

However, a financed car almost always requires full coverage, while a car owned outright doesn't require full coverage. Instead, you can simply carry liability if you choose, which would make your premium much cheaper, but you would be on the hook to repair or replace your car after an accident.

Do you need gap insurance on a financed car?

Gap insurance covers the difference between what you owe on your loan or lease and what your vehicle is actually worth when it was destroyed or stolen. While most leases require gap insurance, it’s not usually required if you finance a vehicle.

However, a brand-new vehicle loses quite a bit of its value after driving it off the lot. So, there is a good chance that for the first two years of ownership, you may owe more on the vehicle than it’s worth. In this case, gap insurance may make sense but be sure to drop the coverage after the vehicle's worth drops below your loan balance.

When can you lower car insurance on a vehicle that's financed?

Once you have paid off the car, you can certainly drop full coverage if you want. However, you still need to carry liability insurance to be legal on the road. The required coverage levels will vary by state.

It should be noted that if you’re in an accident or your vehicle is stolen, flooded, catches on fire, or is vandalized, you’re on the hook for the cost to repair or replace the car. Most experts recommend carrying full coverage until the car is at a point where you would replace it rather than repairing it if you were in an accident. At that point, dropping collision and comprehensive makes sense.