When financing a car, you will need to show the lender proof of full coverage. This is because the lender technically owns the vehicle until the loan is paid off, and they want to protect their investment. Full coverage usually includes comprehensive and collision insurance, which covers damage to your vehicle, regardless of who is at fault. Comprehensive insurance covers damage caused by accidents that don't involve colliding with another vehicle or object, such as vandalism, hail damage, and collisions with animals. Collision insurance, on the other hand, covers damage to your vehicle in the event of a collision with another car or object, regardless of who is at fault. In addition to comprehensive and collision insurance, some lenders may also require you to have liability insurance, which covers damage and medical expenses for other individuals if you cause an accident.
Characteristics | Values |
---|---|
Full coverage | Required by lenders to protect their investment |
Collision coverage | Required by lenders to protect their investment |
Comprehensive coverage | Required by lenders to protect their investment |
Liability coverage | Required by state law |
Underinsured and uninsured motorist coverage | Optional |
Personal injury protection | Optional |
Rental reimbursement coverage | Optional |
GAP insurance | Optional |
What You'll Learn
Lenders require full coverage
When you finance a car, it is usually a requirement to have full auto insurance coverage. This is because the lender still technically owns the vehicle until the loan is fully paid off. Full coverage includes comprehensive, collision, and liability insurance. This allows the lender to protect its asset, the vehicle, which acts as security for the loan in case of default.
Comprehensive insurance covers damage caused by something other than a collision. This includes damage from flooding, hail, fire, vandalism, falling objects, animal collisions, and theft. Collision coverage, on the other hand, pays for damage to your own vehicle, regardless of who caused the accident. Liability insurance, which is required in most states, covers damage and medical expenses for other individuals affected if you cause an accident.
While the specific requirements may vary depending on the lender and state regulations, it is essential to maintain full coverage auto insurance throughout the life of the loan. Failure to do so may result in the lender cancelling the loan and repossessing the vehicle. Once the loan is fully paid off, you may have the option to downgrade to liability coverage, depending on your personal preference and situation.
It is worth noting that full coverage auto insurance can be more expensive than state minimum liability coverage. However, it is crucial to comply with the lender's requirements to avoid any issues with your loan and ensure adequate protection for your vehicle.
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Comprehensive and collision insurance
When you finance a car, you are required to carry full-coverage auto insurance until your loan is paid off. This is to protect the lender's investment in the car. Full coverage includes liability, collision, and comprehensive insurance.
Comprehensive insurance covers damage to your vehicle that is not caused by a crash with another vehicle. For example, if a small pebble strikes your windshield and causes a crack, or if your car is damaged in a flood or hurricane, comprehensive insurance will cover the cost of repairs. Other situations that are covered by comprehensive insurance include vandalism, fire, hail, falling objects, and animal collisions.
Collision insurance, on the other hand, covers any damage to your vehicle caused by a collision, regardless of who is at fault. For example, if you accidentally back into another car in a parking lot or hit a tree or telephone pole, collision insurance will cover the cost of repairs.
The cost of comprehensive and collision insurance can vary depending on various factors, such as the make and model of your vehicle, your driving record, and your location. However, on average, comprehensive insurance costs around $136 per year, while collision insurance costs around $596 per year.
It is important to note that if you do not maintain full coverage on a financed car, your lender may be notified, and you may be in violation of your loan contract. In some cases, the lender may even repossess the vehicle or purchase force-placed insurance, which is very expensive and does not cover you. Therefore, it is crucial to maintain comprehensive and collision insurance on a financed car to comply with the terms of your loan and protect your investment.
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Liability insurance
Bodily injury liability covers medical expenses for injuries you cause to others in an accident. Property damage liability pays for damage you cause to someone else's property, typically their vehicle, but can also include fences, buildings, lampposts, etc.
While liability insurance is a legal requirement, it may not be enough if you have a financed car. When you finance a car, you will need full coverage car insurance, which includes liability, collision, and comprehensive insurance. This is because the lender has a financial stake in the vehicle, and they want to protect their investment. If you can't pay for repairs or pay off the loan if the car is totalled, the lender will lose money.
As such, your loan agreement will require you to carry full car insurance coverage. That way, if your car is damaged, the insurer will pay to repair the damages or pay the lender if the car is a total loss. Your lender will be named as a loss payee on your insurance policy, protecting their investment.
Once you've paid off your car loan, you can drop the full coverage and switch to liability-only insurance if you wish.
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Underinsured and uninsured motorist coverage
Understanding Underinsured and Uninsured Motorist Coverage:
- Uninsured Motorist Coverage (UM): This type of coverage comes into effect when you are involved in an accident with a driver who has no auto insurance. It ensures that you are not left financially burdened by medical bills, vehicle repairs, or other related expenses. UM coverage is typically mandatory in many states and is highly recommended for all drivers. According to the Insurance Information Institute, nearly 13% of drivers countrywide are uninsured, so having this coverage can provide peace of mind.
- Underinsured Motorist Coverage: This coverage is designed for accidents where the at-fault driver has insufficient insurance to cover the damages. It helps pay for your injuries, your passengers' injuries, and any property damage caused by the underinsured driver. This type of coverage is particularly important in states with a high percentage of underinsured drivers.
The specifics of what is covered may vary by state and insurance provider, but generally, underinsured and uninsured motorist coverage can include:
- Medical Bills: This includes coverage for you and your passengers' medical expenses resulting from the accident. It can also cover extended time away from work due to injuries.
- Vehicle Repairs: Underinsured and uninsured motorist coverage can help pay for repairs to your vehicle after an accident with an underinsured or uninsured driver. This ensures that you are not left with a damaged vehicle that you cannot afford to fix.
- Rental Car Expenses: If you need a rental car while your vehicle is being repaired, this coverage can help cover those costs.
- Pain and Suffering Costs: This type of coverage may also compensate you for pain and suffering resulting from the accident.
- Diminished Value: If your vehicle's value decreases due to the accident, this coverage can help make up for the loss in value.
The amount of underinsured and uninsured motorist coverage you need will depend on several factors, including your state's requirements, the value of your vehicle, and your personal preferences. It is recommended to have enough coverage to replace your vehicle and cover any potential medical expenses. You can usually increase your coverage in increments, and it is a good idea to consult with your insurance agent to determine the best coverage options for your specific needs.
The requirement for underinsured and uninsured motorist coverage varies from state to state. While some states mandate this coverage, others make it optional. However, even in states where it is not mandatory, it is highly recommended for all drivers. The risk of being involved in an accident with an underinsured or uninsured driver is significant, and the financial consequences can be devastating without adequate coverage.
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GAP insurance
When you finance a car, it is usually a requirement to have full-coverage insurance. This includes comprehensive and collision coverage, as well as liability insurance. However, there is another type of insurance that you may want to consider when financing a car: Guaranteed Auto Protection (GAP) insurance.
When you buy a new car, it starts to depreciate in value immediately. In fact, most cars lose 20% of their value within the first year. If you were to total your car during this period, your auto insurance would typically only pay the fair market value of the car, which could be less than the amount you owe on your loan. This is where GAP insurance comes in. It will pay off the remaining balance owed on the loan, protecting you from having to pay for a car you can no longer drive.
You can purchase GAP insurance from your car dealer or from your car insurance company, and it is usually quite affordable, with some sources stating that it only adds about $20 a year to the annual premium. The coverage lasts for the entire term of the loan, and if the loan is paid off early, you are entitled to a refund of the unused portion of the GAP fee.
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Frequently asked questions
Banks and lenders require a minimum coverage for a financed car, usually in the form of a full-coverage policy that combines comprehensive, collision, and liability insurance.
While the term "full coverage" is not officially defined, it generally refers to a combination of collision, comprehensive, and liability auto policies.
Collision insurance pays for damage to your own vehicle, regardless of who caused the accident. Comprehensive insurance covers non-collision damage or loss, such as theft, fire, vandalism, or extreme weather.
If you don't maintain full coverage on a financed car, you may be violating your finance contract. The lender may have the right to cancel your auto loan, repossess the vehicle, or force-placed insurance, which is very expensive.
Yes, once you've paid off your loan, you can choose to downgrade from full coverage to liability coverage. However, it's important to evaluate your situation and determine if liability or full coverage is right for you.