Getting Insurance for Financed Vehicles

Last Updated on May 1, 2021

When financing a car, you need different car insurance. The lender partially owns your vehicle, and that means they can require you to carry a specific type of car insurance.

Most lenders require you to carry full coverage car insurance on financed vehicles. Full coverage car insurance includes comprehensive coverage, collision coverage, and liability coverage. Some lenders also require additional insurance coverage.

Getting Insurance for Financed VehiclesWhat type of car insurance should you carry on your financed vehicle? How do you get insurance for a financed car? Today, we’re answering all your questions about getting insurance for financed vehicles.

Table of Contents:

Why Car Insurance Works Differently for Financed Vehicles

Many drivers finance new vehicles. Instead of buying a new vehicle from the dealership for cash, you make a down payment on the vehicle, then make monthly payments over the next three to five years.

When you finance a vehicle, you’re not the exclusive owner of the vehicle. The vehicle is used as collateral to secure the loan. If you fail to make payments on your car loan, then the lender will seize your vehicle to cover the balance of the loan.

Because you’re not the full owner of the vehicle, you must abide by certain requirements – including car insurance.

The lender (like the dealership, a bank, or the dealership’s lending partner) will require you to carry a specific type of car insurance. The lender is also named as a co-insured party on your insurance policy.

This is a normal part of lending. It works the same when buying a home. When buying a house, you list the bank as a co-insured party on your home insurance policy. Financed cars have similar insurance requirements.

Required Car Insurance for Financed Vehicles

When you agree to finance a vehicle, the lender will disclose the car insurance you need to buy.

Most lenders require you to carry full coverage car insurance. Full coverage car insurance protects your vehicle from unexpected damages. It also protects you against liabilities. A standard full coverage car insurance policy includes:

Liability Insurance: Liability insurance is required in most states. It includes bodily injury liability coverage and property damage liability coverage. These coverages cover you against any liability you incur while driving – say, if you injure another driver or damage someone’s car. Liability insurance protects other people, but it does not protect your own vehicle.

Collision Coverage: Collision coverage covers the cost of repairing your own vehicle after an accident, regardless of fault. If you cause an accident and damage your own vehicle, then you can make a claim through your collision coverage for compensation. Collision coverage covers the cost of repairing your vehicle to pre-loss condition.

Comprehensive Coverage: Comprehensive coverage covers damages that occur outside of accidents with other people. It can cover collisions with animals, for example, as well as hail damage, hurricane damage, fire damage, and flood damage. It also covers theft and vandalism. If your car is stolen, then your insurer covers the cost of replacing your vehicle via your comprehensive coverage.

All reputable dealers require a minimum of collision and comprehensive insurance coverage, while the state requires liability coverage. The combination of all three types of coverage is known as full coverage car insurance.

Other Required Insurance for Financed Vehicles

Depending on your state and your lender, you may require other insurance on your financed vehicle.

Some states require you to carry personal injury protection (PIP) coverage, for example, which covers medical bills after an accident. Other states require you to carry uninsured or underinsured motorist coverage. You must carry this insurance on all vehicles, regardless of whether you own or finance your vehicle.

Your lender isn’t concerned about medical bills or bodily injury expenses. These costs do not affect the value of the vehicle, which is the collateral of the loan. That’s why your lender may require uninsured and underinsured motorist coverage on financed vehicles, but your lender is unlikely to require medical payments coverage or PIP coverage.

Uninsured/Underinsured Motorist Property Damage Coverage: Nearly 1 in 7 drivers in the United States are uninsured. That means you have a good chance of colliding with an uninsured motorist in an accident. Millions of more Americans are underinsured, which means they don’t carry sufficient minimum levels of insurance coverage to cover medical bills, vehicle repair costs, and other expenses. That’s why some lenders require you to carry uninsured and underinsured motorist property damage coverage. If you collide with a motorist with no insurance or too little insurance, then you can make a claim through your uninsured/underinsured motorist coverage for compensation.

How Gap Insurance Works for Financed Vehicles

Gap insurance covers the ‘gap’ between the value of your vehicle and the balance of your vehicle loan. It’s also known as lease or loan gap insurance.

Many lenders bundle gap insurance with car payments. Your car payments may include gap coverage. It’s a way for the lender to protect itself if your vehicle is declared a total loss.

Gap insurance is important. Your vehicle drops in value significantly during the first few months of ownership. If you don’t have gap insurance, then you could owe the lender thousands of dollars.

Let’s say you buy a truck for $40,000. Within three months of owning that truck, the value of the truck has dropped to $30,000. You get into an accident and your truck is a total loss. Your insurer checks the value of the vehicle, then gives you $30,000 in compensation for the loss. After all, this is the actual cash value of the vehicle, minus depreciation. However, you still owe $37,000 on your car loan. Your lender is demanding you pay $37,000 to cover the balance of your loan, while you only received $30,000 from your insurer. There’s a ‘gap’ between the amount you received and the amount you owe. Gap insurance covers this difference.

Your dealership may mention gap or lease insurance during the negotiation process. Some dealerships quietly bundle this insurance with car payments, which means you may already have gap coverage without knowing it.

You can buy gap insurance through the dealership or lender. However, you’re better off working with your current insurer. Most insurers offer lease or gap coverage on new vehicles. By buying it from your own insurer, you can save money while getting the same amount of coverage.

How Financing a Car Works

Many people finance cars to lower the initial costs of ownership. Instead of needing to pay $40,000 for a new truck today, you can make a $10,000 down payment and spread the remaining payment out over the next five years.

Here’s the basic process when financing a car:

  • You pay a down payment to the dealership
  • You agree to pay the remaining balance of the vehicle over a multi-year period
  • You continue to make monthly payments to the dealership (or to the dealership’s lender) until the balance of the vehicle has been repaid

Key terms to understand when financing a vehicle include:

Loan Principal: Also known as the financed balance, the loan principal is the amount you borrowed to buy the vehicle. If you bought a $40,000 SUV with a $10,000 down payment, then the loan principal is $30,000. You need to repay this amount plus interest.

Interest Rate: The interest rate is the cost of borrowing money. It’s the annual percentage rate you pay to the lender to borrow the loan principal. You must pay back the loan principal plus interest.

Loan Term: The loan term is the length of time you have to pay off your car loan. You might agree to make $800 payments every month for five years, for example, to pay off your car loan.

These numbers vary based on your financial situation, your credit score, the dealership, the dealership’s bank or lending partner, and other factors.

How Much Does Insurance Cost for Financed Vehicles?

Insurance isn’t more expensive on a financed vehicle. A financed vehicle has the same risk as a vehicle you fully own. You should not pay more for car insurance simply because you’re financing a vehicle.

However, new vehicles tend to have higher insurance premiums than older vehicles. A new vehicle is worth more money. It’s more expensive to repair. Instead of absorbing the risk of your 10-year old SUV worth $10,000, the insurer is covering the risk of your brand new SUV worth $30,000. More risk means higher insurance premiums.

Don’t forget to compare insurance premiums when buying a new vehicle. Many owners get sticker shock. You might think you can afford a new vehicle, only to realize insurance premiums have tripled. It’s crucial to compare insurance premiums before you buy a new vehicle.

Final Word on Insurance for Financed Vehicles

Getting insurance on a financed vehicle is similar to getting insurance on a vehicle you fully own: you must maintain a certain minimum of car insurance throughout the term of the loan.

If you fail to match the lender’s minimum insurance requirements, or if you let insurance lapse at any point during the loan, then the lender could seize your vehicle.

Compare quotes online today to find the best car insurance for financed vehicles.

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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