If you have a car loan or are considering taking out a loan for a vehicle, you have likely wondered if you absolutely have to have insurance. Indeed, auto loan holders mandate vehicles with outstanding debt be insured. However, there is still some question as to what coverage amounts are required and how to get the cheapest possible insurance for financed vehicles. Below, we answer these questions and provide additional insight into ensuring financed vehicles.
Why Auto Insurance is Necessary for Financed Vehicles
Proper insurance must be maintained on a financed vehicle as the lender has some skin in the game. If you were to total the vehicle and lacked adequate insurance, the loan holder would suffer a major financial hit. In such a situation, the insurance company would consider going after your personal assets to compensate for the costs to repair the vehicle following the damage. This is the worst case scenario you and the auto insurer should strive to avoid. The question is what levels of insurance coverage are necessary for your particular vehicle in your specific location based on your auto loan lender’s requirements.
In general, full auto insurance coverage is necessary for vehicles if there is still an outstanding debt owed to a lender. Full coverage is comprised of collision and liability insurance. The state will also mandate that you maintain the bare minimum liability coverage on the vehicle as long as there is a lien holder with a financial stake in the vehicle. Even if your state does not mandate that you have full auto insurance coverage, the financier will require insurance until the last penny is paid to satisfy the loan terms. This is exactly why a growing number of people insist it is best to think of a vehicle obtained with financial assistance as one would an asset in the context of a business. This asset required financing to obtain so it remains mutually held until paid off in full. As a result, auto lenders have some influence in terms of which auto insurance coverage levels are required for a financed vehicle.
Do not Drop Your Auto Insurance!
Do not make the mistake of dropping your mandated auto insurance coverages if you owe anything on the vehicle. Drop insurance coverage on your financed vehicle and you will be in violation of the finance contract. This violation has the potential to put your auto loan in jeopardy. Dropping insurance also creates the potential for the vehicle to be repossessed. In fact, it is even possible for the lender to apply single interest coverage to the vehicle. This type of coverage hikes the loan premium that much more. Making matters worse is single interest coverage does not actually cover your or others in the vehicle. Rather, single interest coverage merely protects the lender’s interests.
How to Determine if You Have the Appropriate Insurance Coverage for Your Vehicle
The average driver is understandably unaware of whether he or she has the proper insurance coverage on their financed vehicle. You can find out if you are required to have full coverage on a vehicle you have in mind or one you recently purchased by speaking directly with auto lenders. If you already purchased the vehicle in question, take a close look at the lease and/or loan paperwork for the details. Do not accept the first quote you get for full coverage on your financed vehicle. This coverage is fairly costly as it pays for natural disasters, theft, and more. Do some price shopping before making a commitment.
Getting the Lowest Auto Insurance Rate for a Financed Vehicle
As noted above, the best way to minimize your auto insurance rates is to do some price comparisons. Dedicate a weekend afternoon to obtaining quotes to insure your financed vehicle. The specific coverage amount hinges on the company that financed the vehicle. Speak with a representative from the lending company to determine which types of insurance are necessary. This way, you will know exactly what you need in terms of insurance coverages before you start comparing quotes.
Take a look at the rates for full and minimum coverage policies. Full coverage typically costs about three times as much as the minimum coverage. However, your accident history and even your credit history have the potential to affect the quote for insuring your financed vehicle. Find out your state’s average annual rates for minimum auto insurance coverage and full auto insurance coverage. This information is valuable as it helps you determine if your quoted rate is truly competitive. Do not immediately opt for the lowest quote simply because it will save you money each month. If you do not secure the right insurance policy, you might end up paying thousands of dollars out-of-pocket after an accident or other damage.
The Gap Insurance Requirement for Financed Vehicles
Some auto loan lenders also request drivers to add gap insurance to their policy. Gap insurance is necessary to insure you against the potential difference between the vehicle’s Actual Market Value, known as AMV, and the amount still owed to the financier. Think of this insurance as a financial safety net that prevents you from losing a substantial amount of money if disaster strikes. If the vehicle is totaled, meaning the aggregate repair costs are greater than the vehicle’s AMV, the insurance company will pay the vehicle’s AMV right down to the penny. Gap insurance guarantees you do not have to pay this difference out-of-pocket.
The Issue of Full Coverage
Drivers looking to minimize the cost of their auto insurance should also consider whether full coverage is worth the money. If the lien holder does not mandate full coverage, it might be best to bypass it unless your vehicle is new or especially costly. Full coverage is necessary for those who live in an area with heavy traffic, harsh weather, a high prevalence of wild animals or a comparably high rate of car theft. However, those who own an older vehicle will find there is minimal benefit to maintaining full coverage unless mandated by the lender.