Finance Firm Auto-Insurance Fees

If you're financing a car, you'll likely be required to have full-coverage insurance, which includes liability coverage, as well as comprehensive and collision coverage. This is to protect the lender's investment in case of an accident or damage to the vehicle. While state requirements vary, lenders may also require additional coverages, such as uninsured motorist coverage or gap insurance.

The cost of full-coverage insurance varies depending on factors such as age, driving history, location, and vehicle make and model. However, it is generally more expensive than state minimum liability insurance. If you don't maintain the required coverage, lenders may purchase force-placed insurance on your behalf, which can be significantly more costly.

What is full-coverage insurance?

"Full coverage" is a general term used to describe a collection of coverages that protect policyholders against various circumstances. While there is no consensus on what "full coverage" means, it typically includes liability, comprehensive, and collision coverage, plus any other coverages mandated by the state.

Liability coverage is mandatory in nearly every state and covers damages or injuries you cause to another vehicle or person. Comprehensive and collision coverage, on the other hand, are optional but can protect your own vehicle from damage caused by events in and out of your control.

Full coverage is often required by lenders when you are financing or leasing a vehicle. This is because it offers more protection than a minimum liability policy, which only covers injuries to others and damage to their property. Full coverage typically includes higher liability limits and can help pay for repairs or replacement of your vehicle in case of an accident.

The cost of full coverage varies depending on factors such as the age and model of your vehicle, your driving history, and the coverage limits you select. On average, full coverage insurance costs around $80-$164 per month in the United States.

Why do finance companies require it?

Finance companies require auto insurance to protect their assets. When you take out a loan to buy a vehicle, the finance company has a vested interest in it until you pay off the loan. If you default on your loan, they can repossess the car and sell it to recover the loan amount. If the vehicle is damaged at the time of repossession, the finance company will have to bear the costs. To avoid this risk, finance companies require borrowers to have full-coverage insurance.

Full-coverage insurance includes liability coverage, as well as comprehensive and collision coverage. Liability coverage pays for third-party medical expenses and property damage when you are at fault in an accident. Comprehensive coverage pays for damage to your vehicle that is not the result of a collision, such as vandalism, hail damage, or collisions with animals. Collision coverage pays for damage to your vehicle when you collide with another object, regardless of who is at fault.

Some lenders may also require borrowers to carry higher liability limits for added protection. Additionally, lenders may limit the deductible amount for comprehensive and collision coverage to ensure that the vehicle is repaired after a loss.

Credit insurance is another type of insurance that lenders may offer when you are financing a vehicle. Credit insurance is optional and designed to make payments to the lender if you die, lose your job, or become disabled. While not mandatory, adding credit insurance will increase your loan amount and the interest you pay over the life of the loan.

What happens if you don't have it?

If you don't have auto insurance, you are not only breaking the law in most states, but you are also putting yourself at great financial risk. According to the Insurance Research Council, one in eight drivers on the road is uninsured.

If you are caught driving without insurance, you will face legal consequences, such as fines, suspension of your driver's license, vehicle registration suspension or revocation, vehicle impoundment, and even jail time. The specific penalties vary depending on the state and whether it is a first or repeat offense.

In addition to legal consequences, there are also insurance consequences. Having a coverage gap will result in higher auto insurance rates in the future, as insurers consider drivers with a coverage gap to be a higher risk. If you cause an accident while uninsured, you will be personally liable for all the costs associated with the collision, including car repair bills and medical expenses for any injuries.

Alternatives to driving without insurance

If you cannot afford standard car insurance, there are alternative options to consider:

• Look into sponsored insurance programs for low-income drivers.
• Check if your state offers exceptions, such as allowing drivers to pay a fee instead of buying insurance or self-insuring.
• Utilize public transportation, ridesharing, or carpooling when possible.
• Borrow a car when needed, as the owner's insurance coverage will typically extend to you as a permissive user.
• Purchase non-owner car insurance if you are an occasional driver who does not own a vehicle.
• Explore coverage discounts and low-cost programs offered by insurance companies.

What happens when you've paid off a financed car?

Once you've paid off your car loan, there are a few things you should do. Firstly, check your credit report, as your credit score can sometimes decrease when you pay off a loan. Secondly, get the necessary paperwork to prove you own the car. The process for this varies depending on the state you live in. In some states, you'll be sent an updated title automatically, while in others, you'll need to contact the DMV to apply for an updated title after receiving a lien release document. This process can take anywhere from two to six weeks, so it's important to get started as soon as possible.

Once you have the title, you can look into different insurance coverage options. Lenders often require a minimum level of insurance to protect their collateral, but once the car is paid off, you may be able to reduce your coverage or get a better rate.

Finally, consider saving the extra funds that you were putting towards your car payment. You could use this money to build up your savings, invest in stocks or bonds, or put it towards other financial goals, such as paying off debt or saving for retirement.

What happens if you damage a financed car?

If you damage a financed car, you are still responsible for the loan. Depending on the severity of the damage, you may have to repair or replace the vehicle. If you cannot pay off the loan, your lender could sue you for the remaining balance, which can lead to wage garnishment or even bankruptcy if you cannot pay.

If you have insurance and are at fault for the accident, your collision insurance will cover any physical damage to your car caused by the collision with another driver. If your car is damaged by something other than a collision, your comprehensive insurance will cover repairs or replacements.

If you have insurance and are not at fault, the at-fault driver should have their liability insurance cover the value of your totaled vehicle. If the responsible driver has no insurance, you'll have to rely on your collision coverage. You could also look into uninsured motorist property damage (UMPD) insurance, which will protect you against uninsured drivers.

If you don't have insurance, you can still file a claim against the other driver's liability insurance for compensation. However, in some states, you may not receive compensation if you are uninsured because of "no pay, no play" laws. These laws mean that even if the accident wasn't your fault, you may not receive compensation from the at-fault driver if you don't have insurance.

Frequently asked questions