Lender-Required Auto Insurance: What You Need To Know

If you're buying a car with a loan from a bank or lender, you'll likely be required to have full-coverage auto insurance. This is because you don't technically own the vehicle, and the lender wants to protect their investment. Full-coverage insurance typically includes liability coverage, as well as comprehensive and collision coverage, offering protection for both you and the lender. The cost of full-coverage insurance varies but averages around $80 per month in the United States. It's important to carefully review the lender's requirements before purchasing insurance to ensure you comply with all the terms.

Lenders require full coverage insurance

The cost of full coverage insurance varies depending on various factors, including your personal risk factors, ZIP code, and vehicle information. On average, full coverage insurance costs around $80 per month in the United States. However, it is important to note that lenders may have specific requirements for the deductible amount and additional coverages, such as gap insurance.

It is also worth mentioning that once the vehicle is paid off in full, you are no longer required to carry full coverage insurance. At that point, you have the option to reduce your coverage to the state-required liability minimums. However, it is recommended to maintain full coverage insurance unless you can easily afford to replace or repair your vehicle in the event of an accident or other incidents.

Liability insurance

In most states, liability insurance is a mandatory requirement for driving legally. The specific requirements may vary by state, but it typically includes bodily injury liability and property damage liability coverage. For instance, if you injure someone in an accident, the bodily injury liability coverage will take care of their medical expenses, while the property damage liability coverage will cover the cost of repairing any property damaged in the accident, such as another vehicle or a fence.

When obtaining a loan to finance a vehicle, lenders usually require borrowers to maintain full coverage auto insurance. This includes liability insurance, as well as collision and comprehensive coverage, to protect their investment. Full coverage ensures that both the lender and the borrower are protected financially in case of an accident.

It's worth noting that the minimum liability coverage required by your state may not be sufficient to cover all expenses in the event of a major accident. It is recommended to assess your financial situation and consider increasing your liability coverage limits to ensure adequate protection.

Additionally, lenders typically mandate that borrowers maintain full coverage insurance throughout the duration of the loan. Once the loan is paid off, you have the option to downgrade to liability-only insurance if you prefer. However, it is essential to carefully evaluate your situation before making any changes to your insurance coverage.

Collision insurance

If you have a financed car, your lender will likely require you to carry a full-coverage auto insurance policy until your loan is paid off. This is because you do not technically own your vehicle—it is your lender or lessor who does. If the vehicle is damaged or totaled, the lender needs to ensure their investment is protected.

When deciding whether to purchase collision insurance, consider the cost of your car and its potential corresponding repairs. If you choose a higher deductible, you will cover more of the cost of repairs when they arise, which in turn lowers your monthly premium. A lower monthly premium is convenient but can put you at risk if you need to make a claim.

Comprehensive insurance

Lenders will often require you to take out a full-coverage insurance policy on your vehicle. This is because, until your loan is paid off, the lender is the owner of the vehicle, and they want to protect their investment. Full-coverage insurance usually includes comprehensive, collision, and liability insurance.

The cost of comprehensive insurance will depend on various factors, including the make and model of your vehicle, its value, and your location. You can shop around for the best rates and use strategies such as bundling policies or increasing your deductible to save money on your premium.

GAP insurance

It's important to note that GAP insurance is not required by lenders, but it can provide valuable financial protection if something happens to your vehicle. Without GAP insurance, you could be left owing thousands of dollars on a car that you can no longer drive.

In California, new laws have been passed that place restrictions on the sale of GAP waivers, including limiting the price, adding new disclosure requirements, banning sales in certain instances, and prohibiting the financing of GAP insurance in auto loans to servicemembers. These laws reflect the concerns of consumer advocates who view GAP waivers as an unnecessary add-on product for many auto buyers.

Frequently asked questions