What’s the Minimum Insurance Coverage for a Financed Car?

Last Updated on December 8, 2022

If you are financing a car, then you need a certain minimum amount of insurance coverage.

Your car is the collateral in a loan, and you do not fully own your vehicle. The lienholder (say, the dealership, bank, or financing company) requires you to protect that collateral with a certain minimum amount of car insurance coverage.

Most financed vehicles require must have full coverage car insurance. If you fail to maintain this minimum amount of coverage, then you could be violating the terms of your lease or financing agreement, allowing your lienholder to cancel your loan and repossess your vehicle.

Keep reading to find out everything you need to know about minimum coverage requirements for financed cars.

Financed Cars Require Full Coverage Car Insurance

If you are leasing or financing a vehicle, then you need full coverage car insurance.

Virtually all leases and financing agreements require you to carry full coverage car insurance to protect the collateral of the loan. The collateral of the loan is your vehicle. Your agreement may also state the minimum car insurance required – say, a 100/300/100 policy with collision coverage, comprehensive coverage, uninsured motorist coverage, and gap insurance.

A standard lease or financing agreement requires the following insurance coverages:

Liability Coverage: Virtually all states require liability coverage. Liability coverage compensates other people for damage you inflict. Liability coverage consists of two main components: bodily injury liability and property damage liability. Bodily injury liability coverage covers medical bills incurred by other drivers, passengers, and pedestrians due to your actions, for example. Property damage liability coverage, meanwhile, covers the cost of repairing or replacing someone else’s property due to your actions – say, if you damage someone else’s vehicle. All standard car insurance policies include liability insurance as an absolute minimum.

Collision Coverage: Collision coverage covers the cost of repairing your vehicle to pre-loss condition after an accident. It also covers the cost of replacing your vehicle. If you cause an accident and it will cost $10,000 to repair your financed car, then collision coverage will cover all of this cost, minus your deductible. Collision coverage is optional in all states but required when leasing or financing a vehicle.

Comprehensive Coverage: Also optional in all states, comprehensive coverage is required when leasing or financing a vehicle. It covers damage that occurs to your vehicle outside of an accident – including fire damage, flood damage, theft, vandalism, collisions with animals, and other incidents. Like collision coverage, comprehensive coverage covers your vehicle up to its actual cash value.

Uninsured and Underinsured Motorist Coverage: Some states require uninsured and underinsured motorist coverage, as do many leases and financing agreements. These coverages compensate you after an accident with a motorist who has no insurance – or not enough insurance to cover damage to your vehicle. It protects your financed car after a hit-and-run accident, for example, and compensates you after a collision with an underinsured motorist.

Gap Coverage: Most leased or financed vehicles require gap coverage. Gap coverage is not part of a standard full coverage car insurance policy, but it may be required on your leased or financed vehicle. Gap coverage covers the difference in value between the actual cash value of your vehicle and the amount owing on your loan or lease. On newer vehicles, there may be a significant gap in the amount owing on your vehicle and the value of the vehicle, and you would need to cover this gap out of pocket after an accident. With gap coverage, insurance covers this gap automatically. Some leases or financing agreements have gap coverage payments built in, while others do not.

How Much Does Full Coverage Car Insurance Cost on a Financed Car?

If you are financing a car, then you must carry full coverage car insurance. The cost of insurance varies based on many factors – including state insurance laws, your driving record, and the actual cash value of your vehicle.

According to our research, the average driver in the United States pays around $1,450 per year for full coverage car insurance.

However, financed cars tend to be newer and have higher actual cash values, so you’ll pay higher insurance premiums. Our research suggests the average driver in the United States pays around $1,674 per year for full coverage car insurance on a financed vehicle.

What Happens If You Don’t Meet Minimum Insurance Coverage Requirements?

Your lienholder may require proof of full coverage car insurance before letting you drive away with the vehicle.

The dealership, for example, may not complete paperwork and give you the keys until verifying you have full coverage car insurance.

If you choose to lower your car insurance below the required limits later, then you are violating your lienholder’s agreement. At this point, the lienholder can legally cancel your auto loan and repossess your vehicle.

Car Insurance Requirements After the Car is Paid

If you have fully paid for your vehicle and completed all financing payments, you are no longer bound by lienholder requirements. You fully own your vehicle, and you can choose to carry as much or as little insurance as you like.

However, you must continue to meet minimum insurance requirements in your state. Most states require you to carry a certain minimum amount of bodily injury and property damage liability coverage. It is illegal to drive on public roads in your state if you don’t carry these minimum amounts of coverage.

Most drivers continue to carry full coverage car insurance after car payments are complete.

Full coverage car insurance covers the full value of your vehicle in multiple situations – including at-fault accidents, theft, vandalism, and more.

Minimum liability coverage, meanwhile, does not protect your vehicle. If you cause an accident and only have minimum liability coverage, you may receive no compensation for vehicle repairs or replacement costs, which could mean losing the full value of the vehicle you just paid off.

Other FAQs About Minimum Insurance Coverage for Financed Cars

Other frequently asked questions when buying car insurance for a financed car include:

Final Word on Minimum Coverage for Financed Vehicles

If you are leasing or financing a vehicle, then you must meet certain minimum insurance requirements as outlined by the lienholder.

The lienholder is the bank, company, or business that loaned money for your car. That lienholder requires a certain minimum amount of car insurance to protect the collateral of the loan – which is the vehicle you’re currently driving.

Check your leasing or financing paperwork to verify insurance requirements. Then, check your car insurance policy to verify you meet or exceed those requirements.

James Shaffer
James Shaffer James Shaffer is a writer for InsurancePanda.com and a well-seasoned auto insurance industry veteran. He has a deep knowledge of insurance rules and regulations and is passionate about helping drivers save money on auto insurance. He is responsible for researching and writing about anything auto insurance-related. He holds a bachelor's degree from Bentley University and his work has been quoted by NBC News, CNN, and The Washington Post.
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