Auto Insurance And Loan Coverage: Understanding The Fine Print

If you're taking out a loan to buy a car, you'll likely be required to have full-coverage auto insurance. This typically includes liability coverage, as well as comprehensive and collision coverage, to protect the lender's investment. While it's not legally required by any state, lenders may also require additional coverages, such as uninsured motorist coverage or GAP insurance.

Lenders require full coverage for financed cars

Lenders typically require full coverage for financed cars. This means that, in addition to liability insurance, you will need to take out comprehensive and collision coverage. Liability insurance is a legal requirement in nearly every state, but comprehensive and collision coverage are not. However, lenders will usually require you to take out this additional coverage to protect their investment.

Comprehensive insurance covers damage to your vehicle due to theft, vandalism, natural disaster, or other non-collision events. Collision insurance covers any damage to your vehicle, regardless of who is at fault.

Some lenders may also require additional coverages, such as uninsured motorist coverage or gap insurance. Uninsured motorist coverage will pay for damages after a crash with an uninsured driver. Gap insurance will pay off the remainder of your loan if your vehicle is totalled before you pay it off.

If you don't take out the required coverages, the lender may purchase insurance on your behalf and add the cost of the policy to your monthly loan payments. This is known as force-placed insurance and is much more expensive than a regular policy.

Liability insurance is mandatory in most states

Liability insurance covers any damage or injury to other drivers and their vehicles that you cause in an accident. It generally pays the other driver's medical, vehicle repair, and other costs when the policyholder is the at-fault driver in an accident. This includes bodily injury (BI) per person and per accident, as well as property damage (PD). The minimum liability limits required vary by state, with the first number referring to BI liability per person injured in an accident, the second number referring to BI liability for all persons injured in an accident, and the third number referring to the PD liability limit. For example, in the District of Columbia, the minimum liability limits are $25,000 for BI per person, $50,000 for BI per accident, and $25,000 for PD.

In addition to liability insurance, some states also require uninsured motorist coverage and/or underinsured motorist coverage. Uninsured motorist coverage compensates policyholders when another driver who is at fault for the accident does not have auto liability insurance or is a hit-and-run driver. Underinsured motorist coverage compensates a policyholder when the at-fault driver has insufficient auto liability insurance.

While comprehensive and collision coverage are not mandated in any state, lenders typically require them for financed vehicles to ensure the vehicle can be repaired or replaced if it is damaged or totaled. Comprehensive coverage pays for damage caused by events other than accidents, such as vandalism, theft, or weather-related damage. Collision coverage pays for damage to your own vehicle, regardless of who caused the accident.

Collision and comprehensive insurance are optional but often required by lenders

Collision and comprehensive insurance are optional but are often required by lenders. This is because they want to protect their investment. If you lease a car or take out a loan to buy one, your lender or leasing company will probably require you to carry both types of insurance. This is to ensure that the vehicle can be repaired or replaced if it is damaged or written off.

Collision insurance covers damage to your car if you hit an object or another vehicle. It also covers damage to your car if someone else hits you. Comprehensive insurance covers theft or damage from causes other than accidents, such as bad weather, fire, or fallen trees. It also covers damage from animal collisions and riots.

While these types of insurance are not required by law, they are often sold as a package and can provide valuable protection for many drivers. If you are considering buying a car on finance, it is worth checking with your lender to see if they require you to have collision and comprehensive insurance.

The cost of collision and comprehensive insurance can vary depending on factors such as the insurer, your location, the value of your vehicle, and the deductible amount you choose. The deductible is the amount that is subtracted from a claim payout, so choosing a higher deductible can lower your premium. However, it is important to remember that a higher deductible will also increase the amount you have to pay out of pocket if you make a claim.

GAP insurance covers the difference between insurance payout and loan amount

When you take out an auto loan, banks and lenders will usually require you to have a full-coverage policy that combines comprehensive, collision, and liability insurance. However, this insurance may not cover the entire cost of the vehicle in the event of a total loss. This is where GAP insurance comes in.

Guaranteed Asset Protection (GAP) insurance is an optional coverage that can be added to a car insurance policy. It covers the difference between the insurance payout and the remaining loan amount in the event of a total loss. This type of insurance is useful when the remaining loan amount is higher than the current value of the vehicle.

For example, let's say you still owe $25,000 on your loan, but your car is only worth $20,000. If your car is totalled or stolen, your comprehensive or collision insurance will pay out the actual cash value (ACV) of the vehicle, minus your deductible. With GAP insurance, the remaining $5,000 gap would also be covered, so you wouldn't have to pay it out of pocket.

It's important to note that GAP insurance doesn't cover all scenarios. It only applies when there is a total loss, such as when a vehicle is stolen or deemed a total loss after an accident. Additionally, GAP insurance doesn't cover other property damage, injuries, engine failure, or other repairs.

While GAP insurance is not required by law, some lenders or leasing companies may require it to protect their investment. It is generally a good idea to consider GAP insurance if there is a significant difference between the value of your car and the amount you owe, if you've made a small down payment, or if you have a long financing term.

Credit insurance covers loan payments if you die, lose your job, or become disabled

Auto insurance does not cover the loan amount, but lenders will require minimum coverage for a financed car, usually in the form of a full-coverage policy that combines comprehensive, collision, and liability insurance. This policy protects the lender's investment and their asset, the vehicle, which secures the loan in case of default.

Credit insurance, on the other hand, is an optional insurance product that covers your loan payments if you die, lose your job, or become disabled. It is important to note that credit insurance is not the same as auto insurance, and it is not required by lenders. It is a separate product that you can choose to purchase to protect yourself and your loan in the event of unforeseen circumstances.

There are four main types of credit insurance:

Credit Life Insurance

This type of insurance pays off all or a portion of your outstanding loan amount in the event of your death. It ensures that your debt is settled and your loved ones are not burdened with the loan payments.

Credit Disability Insurance

Also known as accident and health insurance, this type of insurance covers your loan payments if you become ill, injured, or disabled and are unable to work. It provides financial support during a challenging time and helps you keep up with your loan obligations.

Involuntary Unemployment Insurance

Involuntary unemployment insurance, also called involuntary loss of income insurance, comes into effect if you lose your job through no fault of your own, such as a layoff. It ensures that your loan payments are made while you are between jobs, providing peace of mind during a difficult transition.

Credit Property Insurance

Credit property insurance covers your vehicle if it is stolen or destroyed in an accident or natural disaster. This type of insurance generally pays out the value of your vehicle or the balance of your loan, whichever is less. It is worth noting that credit property insurance may be included in your regular automobile insurance policy, so careful consideration and cost comparison are recommended before acquiring separate credit property insurance.

Credit insurance can provide valuable protection in the event of unforeseen circumstances, but it is important to carefully review the terms, conditions, and costs associated with it. It may be an optional add-on, but it increases your overall loan amount and the interest you pay over the life of the loan. Therefore, it is essential to understand your needs, assess the value it brings, and make an informed decision.

Frequently asked questions