Do You Need Full Coverage on a Financed Car?

Last Updated on September 17, 2023

If you’re financing a car, then you may need specific insurance coverage – including full coverage car insurance.

Virtually all auto loans require you to carry full coverage on a financed car. Full coverage car insurance protects the collateral of the loan – the vehicle. If you drop full coverage car insurance, then you could be violating the terms or your financing agreement.

Keep reading to find out everything you need to know about full coverage on a financed car.

Key Takeaways:

• Full coverage car insurance is required for most auto loans to protect the lender’s interest in the vehicle.
• Dropping full coverage car insurance on a financed car can lead to penalties, such as higher insurance costs or repossession of the vehicle.
• Full coverage car insurance covers damage to your own vehicle from accidents and other situations, while liability insurance only covers damage to others.
• You can drop full coverage car insurance once you pay off your auto loan and own the vehicle outright, but you may still want to keep it for extra protection.

Most Auto Loans Require Full Coverage Car Insurance

If you are financing a vehicle, then you don’t own the vehicle outright. Instead, you have borrowed money from a lender for that vehicle, and the lender has a stake in the vehicle.

To protect the collateral of the loan, the lender generally requires full coverage car insurance. In almost all cases, you must carry full coverage car insurance to abide by the terms of your financing agreement.

If you drop full coverage car insurance on a financed vehicle, your lender could:

• Cancel your auto loan and repossess your vehicle
• Buy a full coverage policy on your behalf at a much higher price, then add this cost to your monthly auto loan payments

To ensure you abide by your financing agreement, you must carry full coverage car insurance until you make your final financing payment.

Why You Need Full Coverage Car Insurance

No state in America requires full coverage car insurance. So why do lenders require full coverage car insurance?

States require a certain minimum amount of liability insurance – say, $100,000 of bodily injury liability coverage and $50,000 of property damage liability coverage. These coverages protect other people from damage you cause. If you crash into another car, for example, then this insurance covers the medical bills and car repair costs of the other person.

However, minimum liability insurance carries no protection for your own vehicle. No state requires you to carry coverage for your own vehicle. You’re only required to carry coverage to protect other drivers and other vehicles.

Full coverage car insurance does cover your own vehicle. It includes collision coverage (to repair your car after an accident) and comprehensive coverage (to protect from theft, vandalism, environmental damage, and other damage that occurs outside of an accident).

How Full Coverage Car Insurance Works

Full coverage car includes provides full protection for your vehicle from most unexpected situations. It also includes liability insurance, which is required by the state to protect other drivers and their property.

Full coverage car insurance consists of three crucial components:

Liability Insurance: Almost all states in America require liability insurance, including bodily injury liability coverage and property damage liability coverage. Bodily injury liability coverage can cover the other driver’s medical bills, lost wage compensation, and other personal expenses they incur as a result of your actions, assuming you were at fault. Property damage liability coverage, meanwhile, covers the cost of repairing the other driver’s vehicle (or other property) after an accident.

Collision Coverage: Collision coverage covers the cost of repairing your own vehicle after an accident. No state requires you to carry collision coverage. Without collision coverage, however, you would need to pay out of pocket to repair your own vehicle after an accident.

Comprehensive Coverage: Comprehensive coverage covers damage that occurs to your vehicle outside of accidents. It covers theft, vandalism, hail damage, fire damage, water damage, collisions with animals, broken windshields, and other incidents, for example.

Other Coverages: Depending on your insurer and plan, your full coverage policy may include other items – like roadside assistance, gap insurance, personal injury protection, medical payments coverage, and other coverages.

What Happens If You Don’t Have Full Coverage Insurance on a Financed Car?

Virtually all auto loans require you to carry full coverage car insurance.

Without full coverage car insurance, you could lose your car in a total loss accident and receive no compensation, which means the lender may not be repaid. Full coverage car insurance protects the collateral of the loan.

If you don’t carry full coverage car insurance, then you are violating the terms of your financing agreement. You have broken the contract, and you could face penalties.

Typically, lenders or dealerships take one of two actions if you drop full coverage car insurance on your financed vehicle:

Purchase Insurance on Your Behalf at a Much Higher Cost: In most cases, the lender will purchase full coverage car insurance on your behalf – typically at a much higher price. Your insurance company may notify the lender when you drop full coverage car insurance, and your lender will respond by purchasing a full coverage policy on your behalf. This insurance will be much costlier than an ordinary full coverage policy. And, your lender will add it to your ordinary car loan payments. If you fail to make the car loan payments with the added cost of insurance, then the lender can cancel your loan and repossess your vehicle.

Cancel your Auto Loan & Repossess your Vehicle: Your lender or dealership could cancel your auto loan and immediately repossess your vehicle – just like they would if you missed a payment. You are required to abide by the terms of your financing agreement. If you don’t make regular payments or carry appropriate insurance, then you could be violating that financing agreement, leading to the cancellation of the loan and repossession of your vehicle.

How Does the Lender Know You Dropped Full Coverage Car Insurance?

Let’s say you have full coverage car insurance when you purchase a vehicle. As you continue to finance your car, you drop full coverage car insurance to save money. How does the lender know you dropped full coverage car insurance?

Your insurance policy should list the lender as a co-insured party. Both you and the lender “own” the vehicle. You both have an insurable interest in the vehicle.

If you suddenly decide to drop full coverage car insurance while still paying off your vehicle, then your insurance company may notify your lender, forcing your lender to take action.

In some states, the DMV will also notify the lender that you dropped full coverage car insurance. Your insurer may notify the DMV of any changes to your insurance coverage, and the DMV could alert your lender.

When to Drop Full Coverage Car Insurance

Once you own your car outright, you can drop full coverage car insurance. As soon as you complete your last financing payment, you can remove your lender as a party on your insurance policy, then adjust your coverage however you like.

Generally, most vehicle owners continue to carry full coverage car insurance for most of the time they own the vehicle. Without full coverage car insurance, you would pay for vehicle repairs and other costs out of pocket.

However, as your vehicle gets older, it may be worth dropping full coverage car insurance. Eventually, the cost of repairing the vehicle is more than the vehicle is worth, at which point it may be safe to drop full coverage car insurance.

Final Word

Virtually all auto loans require you to carry full coverage car insurance for as long as you make financing payments.

Full coverage car insurance protects the collateral of the loan – the vehicle.

If you drop full coverage car insurance, the lender may purchase a full coverage policy on your behalf at a much higher price.

Or, in some cases, the lender cancels the auto loan and repossesses your vehicle as soon as you drop full coverage car insurance.

Check your lending paperwork and insurance policy to verify you’re carrying the required full coverage car insurance through the duration of your auto loan.