Auto Financing And Loan Insurance: Understanding The Connection

When you take out a loan to buy a car, you are usually required to take out an insurance policy to cover the cost of the loan in the event of your death, illness, injury or unemployment. This is known as credit insurance, and it is optional in the eyes of the state. However, lenders will often require you to take out a full-coverage insurance policy to protect their investment. This means that if you are unable to make payments on your loan, they can recover their costs by repossessing and selling your car.

Credit insurance

There are four main types of credit insurance:

• Credit life insurance covers all or a portion of your loan in the event of your death.
• Credit disability insurance, also called accident and health insurance, covers loan payments if you become ill or injured and are unable to work.
• Involuntary unemployment insurance, also known as involuntary loss of income insurance, covers loan payments if you lose your job through no fault of your own, such as in a layoff.
• Credit property insurance covers your vehicle if it is stolen, destroyed in an accident, or damaged by a natural disaster. This type of insurance typically pays the value of your vehicle or the balance of your loan, whichever is less. It is important to note that credit property insurance may already be included in your regular automobile insurance policy, so careful cost comparisons are recommended before acquiring separate credit property insurance.

The cost of credit insurance is generally priced between 2% and 4% of the amount borrowed. It is worth noting that credit insurance is optional and may not be a valuable addition for everyone. Before deciding to purchase credit insurance, it is important to understand the terms of the policy being offered and consider your individual circumstances. Additionally, you have the right to cancel credit insurance products at any time to reduce your costs.

Full coverage

When taking out an auto loan, financing companies will require you to carry full-coverage auto insurance until the loan is paid off. This is because the vehicle acts as collateral for the loan, and the financing company will want to protect its investment. Full-coverage insurance generally includes comprehensive and collision coverage on top of the state-minimum insurance.

Full-coverage insurance usually refers to a policy that includes the state-minimum coverage and adds at least collision and comprehensive insurance. Collision insurance covers damage to your vehicle, regardless of who is at fault for an accident. Comprehensive insurance covers damage to your vehicle due to theft, vandalism, natural disaster, or other non-collision events.

Financing companies require full coverage to protect their investment. When you take out a loan to purchase a vehicle, the financing company has a vested interest in your vehicle until you pay off your loan. If you default on your loan, they have the option of repossessing the car and selling it to satisfy the terms of your loan. If the vehicle is damaged at the time of the repossession, the financing company will incur the costs. To mitigate this risk, the financing company wants to ensure you can cover this cost in the case of an accident.

If you don't obtain full coverage on a financed car, your lender may require you to obtain it or face penalties. Without full coverage, you risk not having enough coverage to repair or replace your car in case of an accident or theft. In some cases, your lender may even repossess the vehicle.

Cost of Full Coverage

The cost of full-coverage insurance will vary depending on various factors, such as the make and model of your vehicle, its value, and your driving record. The national average cost of full-coverage car insurance is $1,730 per year, according to one source. Another source puts the average cost at $2,542 per year.

To save money on full-coverage insurance, you can shop around and compare quotes from different insurers. You can also consider increasing your deductibles, though it's important to choose levels you can afford to pay out of pocket if needed. Additionally, look for discounts offered by insurers, such as bundling discounts or safe driving discounts.

GAP insurance

Guaranteed Asset Protection (GAP) insurance is an optional add-on product that can be purchased alongside an auto loan. It is a supplemental form of coverage that protects you from financial loss if you total a car that is being financed or leased.

When you buy a new car, it starts to depreciate in value as soon as it leaves the car lot. Most cars lose 20% of their value within a year. Standard auto insurance policies cover the depreciated value of a car, meaning they pay the current market value of the vehicle at the time of a claim. However, in the early years of the vehicle's ownership, the amount of the loan may exceed the market value of the vehicle itself.

You can purchase GAP insurance from your car dealer or from car insurers, who typically charge less than the dealer. On most auto insurance policies, including GAP insurance with collision and comprehensive coverage adds only about $20 a year to the annual premium.

Lender requirements

When you finance a car, you don't become the legal owner or titleholder until you've paid off the loan. This means that the lender has a lien on the title until the loan balance is zero. While there is a lien on the title, the insurance company is free to dictate how much insurance you must purchase. Lenders will require you to take out a full-coverage insurance policy on the vehicle. This is because the vehicle acts as collateral for the loan.

Full coverage includes liability coverage, as well as comprehensive and collision coverage, offering comprehensive protection for both you and the lender. This means that the insurance company will pay for damage to your vehicle, regardless of who is at fault for an accident. It also covers damage to your vehicle due to theft, vandalism, natural disaster or other non-collision events.

Some lenders may also require GAP insurance, which can help pay your car loan off in the event of a total loss.

If you fail to keep your insurance active, the lender can add force-placed insurance costs to the loan. This is a lot more expensive than a regular policy and you will still be required to pay it.

It's important to read the lender requirements carefully before you get insurance quotes to make sure you comply with all the terms. For example, some banks require you to carry a policy with a deductible of no higher than $500 to ensure you can seek the necessary vehicle repairs after an accident.

Repossession

In many states, your lender can repossess your car as soon as you default on your loan or lease. This means that if you miss a payment, your car could be taken away without warning or a court order. However, some states require lenders to send a notice before repossession, giving you time to make up missed payments. It's important to know the laws in your state and what your lender is required to do.

After your car has been repossessed, your lender can either keep it to cover your debt or sell it. If your car is sold, you may still be responsible for paying the difference between the amount left on your loan, plus repossession fees, and the sale price. This is known as a "deficiency balance". On the other hand, if your car is sold for more than you owe, you're entitled to receive the surplus funds.

Your Rights During Repossession

Even though your car has been repossessed, you still have certain rights. For example, you have the right to be notified before your vehicle is sold or kept as compensation for your debt. This gives you the opportunity to buy back your car by paying the full loan amount, plus repossession costs. You also have the right to retrieve your personal belongings from the repossessed car. Contact your lender right away to arrange a time to pick up your belongings.

How to Prevent Repossession

The best way to prevent repossession is to stay on top of your car payments. However, if you're unable to make payments, there are a few things you can do:

• File for bankruptcy: Filing for Chapter 13 or Chapter 7 bankruptcy may allow you to keep your car.
• Speak with your lender: Explain your situation to your lender and see if you can work out a new payment plan.
• Purchase wisely: Don't agree to a payment that you can't afford. Try to make a down payment and find a low-interest rate loan.

Voluntary Surrender

If you're unable to continue paying for your car, you can return it to the lender or dealership. This is called a "voluntary surrender" or "voluntary repossession". While this can help you avoid paying repossession fees, you will still be responsible for the deficiency balance after the lender sells your car.

Frequently asked questions