Vehicle Finance Insurance: What You Need To Know

Vehicle finance insurance is a type of insurance that covers vehicles that have been financed through a loan or lease. When a vehicle is financed, the lender or leasing company typically requires the driver to carry full coverage insurance, which includes liability, collision, and comprehensive coverage. This protects their investment in the vehicle, as they technically own the car until the loan is fully paid off. In addition to the state-mandated minimum insurance requirements, drivers of financed vehicles must also comply with the lender's insurance requirements, which often include active collision and comprehensive coverage.

Lenders require full coverage

When you finance a car, you don't fully own it until you've paid off the loan in full. The lender holds the title until the loan is satisfied. This means that the lender has a financial stake in the vehicle, and any damage to it is a risk not only for you but also for your finance company. If you can't pay out of pocket to repair the car or pay off the loan if it's totalled, the lender will lose money.

As a result, lenders require full coverage insurance on financed vehicles. This requirement ensures that their investment is protected in case of an accident or damage to the vehicle. Full coverage includes liability coverage, as well as comprehensive and collision coverage, offering comprehensive protection for both you and the lender.

Full coverage insurance usually refers to a policy that includes the state-minimum coverage and adds at least comprehensive and collision insurance. Comprehensive coverage protects your vehicle when damages occur from something other than a collision with another car or object. Examples of damages covered under comprehensive insurance include contact with animals, theft, storm damage, and vandalism. Collision coverage, on the other hand, protects your vehicle from damages resulting from a collision with another car or object, regardless of who is at fault.

In addition to comprehensive and collision coverage, lenders may also require you to carry higher levels of liability coverage. Liability coverage pays for damage and injuries that you cause to others. It is split into bodily injury liability, which covers medical expenses, and property damage liability, which covers repair costs.

The cost of full coverage insurance varies depending on various factors, including the make and model of your vehicle, its value, and your driving record. On average, full coverage insurance costs around \$80 per month in the United States. However, it is important to shop around and compare quotes from multiple providers to find the most affordable option.

If you don't obtain full coverage on a financed car, your lender may require you to obtain it or face penalties. They may also add force-placed insurance to your loan, which is much more expensive than a standard policy. Therefore, it is crucial to understand your lender's specific insurance requirements and ensure that you meet their criteria.

Comprehensive coverage

When you finance a car, you are required to show the lender proof of full coverage. This includes comprehensive coverage, which is a type of automobile insurance that covers damage to your car from causes other than a collision. Comprehensive insurance will cover your vehicle if it is destroyed by a tornado, dented by a deer, spray-painted by a vandal, damaged by a break-in, or crushed by a collapsing garage, among other causes. It is designed to pay for repairs to your vehicle caused by things other than a collision.

Comprehensive insurance covers damage to your car from animals, falling trees, natural disasters, theft, and vandalism. It does not cover damage to other vehicles or people. It also does not cover damage caused by a collision with another vehicle or object, or injuries to a passenger or another person.

Comprehensive insurance is optional if you own your vehicle outright. However, if you finance or lease a car, your lender will likely require you to have comprehensive coverage. This is because the lender has a financial stake in the vehicle, and comprehensive insurance protects their investment. If you do not meet the insurance requirements set by your lender, they may take out force-placed insurance on your behalf, which will be added to your loan payments.

The cost of comprehensive insurance will vary based on the value of the vehicle, the zip code where it is registered, and the driver's past insurance history, among other factors. The average cost of comprehensive insurance ranges from approximately $134 per year to nearly double that amount.

There are advantages and disadvantages to comprehensive insurance. It can protect you financially from theft, natural accidents, and weather-related damage. However, it may be expensive, especially if you are purchasing it along with collision insurance. If your vehicle is older and paid off, you may save money by not purchasing comprehensive coverage, especially if theft and weather-related events are not a concern in your area.

Collision coverage

When financing a car, you will need to show the lender proof of full coverage. This includes collision coverage, which is an extension of a basic automobile policy and covers the cost of repairing or replacing your car after a collision. Collision coverage is required by lenders to protect their investment in the car.

The cost of collision coverage can be expensive, but people can save on premiums by choosing a higher deductible. According to NerdWallet's analysis, the average cost of full coverage insurance, which includes collision coverage, is $1,718 per year. However, rates can vary depending on factors such as the car you drive, how many miles you drive, and where you live.

Liability coverage

When you finance a vehicle, you are required to buy full-coverage car insurance to protect your lienholder's investment. This includes liability coverage, which is mandatory in most states. Liability coverage is the part of a car insurance policy that provides financial protection for a driver who harms someone else or their property while operating a vehicle. It covers the financial cost of injuries or damages to third parties and their property, but not to the driver or the driver's property.

Liability car insurance is split into two parts: bodily injury liability and property damage liability. Bodily injury liability helps cover medical expenses for those involved in the accident, while property damage liability helps cover the costs of repairing the vehicles of other drivers involved in the accident.

Each state sets a minimum for how much liability coverage a motorist must carry, and drivers can typically buy more than their state's required minimums. For example, a state might require all drivers to have liability insurance that covers $25,000 for injuries to one person, $50,000 for injuries to multiple people, $50,000 for the death of one person, and $10,000 for property damage.

If you have considerable assets, you may want to consider buying an umbrella insurance policy, which can increase the liability coverage on both your auto and homeowners insurance policies to $1 million or more.

While liability insurance is available with lower limits, such as 50/100/50, most lenders will require you to carry higher limits. For example, a policy with liability coverage of 50/100/50 provides $50,000 per person in liability bodily injury coverage, a total of $100,000 in liability injury coverage per accident, and $50,000 in property damage coverage.

Failing to obtain liability coverage could result in your license being suspended, fines, or even jail time for repeat offenses.

Gap insurance

When buying a new car, the amount of the loan may exceed the market value of the vehicle in the early years of ownership. This is because most cars depreciate quickly after they are purchased. In the event of an accident that totals the car, gap insurance covers the difference between the current value of the car (which is covered by standard insurance) and the amount still owed on the loan.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance will cover the $5,000 difference, minus your deductible. Gap insurance is designed for situations where the car owner is left owing money on a totaled car.

The cost of gap insurance varies depending on the insurer and the value of the car. It typically costs a few dollars a month or around $20 a year. Some lenders charge a flat fee of $500 to $700.

When purchasing gap insurance, it is generally recommended to buy it through your auto insurer rather than from a dealership, as it can be significantly more expensive from a dealer.

Frequently asked questions