Insuring Your New Financed Vehicle

If you're buying a new car, you'll likely need a loan to cover the cost. This means that you don't technically own your vehicle, and your lender will require you to have insurance to protect their investment. This insurance is known as full coverage and includes comprehensive, collision, and liability insurance. It covers the cost of repairing or replacing your vehicle if it's damaged or destroyed and also covers any damage or medical expenses for other individuals if you cause an accident. While the specifics of full coverage vary by state and lender, it's important to have this insurance to protect yourself and your investment.

Lenders require full coverage

Full coverage is more expensive than a liability-only policy as it includes additional coverages such as comprehensive and collision. The cost of full coverage varies depending on factors such as the driver's age, driving history, location, and the vehicle's make and model. On average, full coverage insurance costs around $80 per month or $1,730 to $1,895 annually in the United States.

Lenders may also require additional coverages, such as uninsured motorist coverage or gap insurance. Uninsured motorist coverage protects you in the event of an accident with a driver who doesn't have insurance, while gap insurance covers the difference between the insurance payout and the remaining loan balance if your vehicle is totalled.

Failing to maintain full coverage on a financed vehicle can result in penalties or legal action by the lender. The lender may cancel the auto loan and repossess the vehicle or purchase insurance on your behalf, known as force-placed insurance, which is typically more expensive. Therefore, it is essential to maintain full coverage throughout the loan term to comply with the lender's requirements and avoid additional costs.

Liability insurance

When you finance a vehicle, your lender will likely require you to carry a full-coverage auto insurance policy, which includes liability insurance plus comprehensive and collision coverage. This is to protect their investment in the vehicle, which serves as collateral for the loan. If you don't have full coverage and your car is stolen or totaled, you will still need to pay off the loan for a vehicle you no longer have.

The specific requirements for liability insurance may vary depending on the lender and the state in which you live. It is important to carefully review the details of your loan agreement and the insurance policies you are considering to ensure that you comply with all the terms and have the necessary coverage.

In summary, liability insurance is a crucial component of auto insurance, especially when financing a vehicle. It protects you from financial liability in the event of an accident by covering the property damage and medical expenses of other parties.

Comprehensive coverage

When insuring a new financed vehicle, you will need to show the lender proof of full coverage. This is because the lender has a financial stake in the vehicle and wants to protect their investment. As such, they will require you to have comprehensive and collision coverage, in addition to liability and any other legally required coverages.

Comprehensive insurance covers damage to your car from causes other than a collision. This includes damage from animals, natural disasters, theft, and vandalism. It also covers damage from falling objects, including branches, rocks, or hail. If you live in an area with a high risk of collisions with animals, or an area prone to storms or high crime, comprehensive insurance is a good idea.

Comprehensive insurance is optional if you own your vehicle outright. However, if you are financing your vehicle, the lender may require you to have it. If you are financing a vehicle, you must buy full coverage to protect your lienholder's investment. This is because the lender technically owns your vehicle until you make the final payment.

The cost of comprehensive insurance varies depending on multiple factors, such as the state you live in, the value of your vehicle, and your driving record. The deductible for comprehensive insurance, which is the amount you pay towards the cost of any repairs, can be adjusted to lower your premiums. If you think you are unlikely to make a claim, you could choose a high deductible to lower your premiums.

If you are financing a vehicle, it is important to carefully read the terms of your loan agreement to understand the specific insurance requirements.

Collision coverage

When you finance a vehicle, you are required to purchase full-coverage insurance to safeguard your lender's investment. Collision coverage is a crucial aspect of this, as it ensures that your vehicle can be repaired or replaced if damaged in a collision. This coverage is mandatory for financed vehicles because it protects the lender's financial interest in the car.

The requirement for collision coverage on a financed vehicle may vary depending on the lender and state regulations. However, it is generally considered a necessary component of full-coverage insurance. Before purchasing insurance for your financed vehicle, carefully review the lender's requirements to ensure compliance with all terms.

It's important to note that collision coverage usually comes with a deductible, which is the amount you must pay before the insurance company covers the rest. The deductible can range from $500 to $2,500, depending on the insurance company and lender requirements.

While collision coverage is essential for protecting your finances in the event of a collision, it may not be necessary if your vehicle is old or has a low market value. In such cases, the potential insurance payout may not justify the cost of the coverage. However, for financed vehicles, lenders typically require collision coverage until the loan is fully paid off.

Gap insurance

When you buy a new car, it starts to depreciate in value as soon as it leaves the car dealership. Most cars lose 20% of their value within a year. Standard auto insurance policies cover the depreciated value of a car, which means that they pay the current market value of the vehicle at the time of a claim. This can leave a gap between what your vehicle is currently worth and the amount you still owe on your loan.

Some lenders may require gap insurance, especially if you have a lease vehicle, made a smaller down payment, or have a longer financing term. However, it is not required by any insurer or state. You can purchase gap insurance from your car dealer or your auto insurer, and it is typically more affordable through the latter. On most auto insurance policies, including gap insurance with collision and comprehensive coverage adds only about $20 a year to the annual premium.

Frequently asked questions