Lenders' Mandatory Auto Insurance: What You Need To Know

When it comes to auto insurance, lenders typically require full coverage for financed vehicles. This is because lenders want to protect their investment in the event of an accident or damage to the vehicle. Full coverage includes liability insurance, which is required in most states, as well as collision and comprehensive insurance. Collision insurance covers damage to the insured's vehicle, regardless of who is at fault in an accident, while comprehensive insurance covers damage caused by events other than collisions, such as theft, vandalism or natural disasters. Lenders may also require additional coverages, such as uninsured motorist coverage or gap insurance, which covers the difference between the amount owed on the vehicle and its actual cash value in the event of a total loss. While the specific requirements may vary by lender, it is important for borrowers to maintain the necessary insurance coverage to avoid penalties or repossession of their vehicle.

Comprehensive coverage

Lenders typically require borrowers to purchase full-coverage insurance on a vehicle while they are still paying off the loan. This includes comprehensive coverage, which is often mandatory, as well as collision coverage and liability insurance.

Collision coverage

When deciding on the amount of collision coverage, consider the cost of your car and the potential cost of repairs. A higher collision deductible will lower your monthly premium, but it also means you will cover more of the repair costs when needed. On the other hand, a lower deductible will result in a higher monthly premium but can provide greater peace of mind in the event of an accident.

Lenders typically require borrowers to maintain collision coverage on their vehicles to protect their investment. This is especially true when the lender is a co-owner of the car, as is often the case with leased or financed vehicles. By ensuring the vehicle is covered in case of an accident or damage, lenders can safeguard their financial interests.

In summary, collision coverage is a vital component of auto insurance, providing financial protection for vehicle owners and lenders alike in the event of collisions or accidents.

Liability coverage

Property Damage Liability Coverage

Property damage liability coverage comes into effect when you are legally responsible for a car accident, covering the costs of repairing or replacing another person's property. This typically includes the other driver's vehicle but can also extend to other types of property, such as mailboxes, fences, or buildings. It also covers legal fees if you are sued for property damage.

Bodily Injury Liability Coverage

Bodily injury liability coverage takes care of the medical expenses and, in some cases, lost wages of individuals injured in an accident for which you are at fault. It may also provide legal defence costs if the injured party decides to take legal action. This aspect of liability coverage ensures that you are not left financially vulnerable in the event of causing accidental harm to others.

Understanding Liability Coverage Limits

State Requirements for Liability Coverage

While liability coverage is mandated in most states, the specific requirements can vary. Some states may mandate additional coverages, such as personal injury protection, uninsured or underinsured motorist protection, or property protection. It is essential to review the laws and regulations of your state to ensure compliance with the minimum liability coverage requirements.

Full Coverage and Lenders' Requirements

If you are financing a vehicle through a loan or lease, lenders will typically require full coverage insurance, which combines liability, collision, and comprehensive coverages. This ensures that their investment in the vehicle is protected. Lenders may also set specific deductible amounts and coverage limits to safeguard their financial interests.

Uninsured/underinsured motorist coverage

Uninsured motorist coverage specifically applies when you are hit by a driver with no auto insurance, while underinsured motorist coverage applies when the other driver doesn't have enough coverage to pay for the damages or injuries they caused. In some states, such as Illinois, both types of coverage are required, while others, like Massachusetts and South Carolina, only require uninsured motorist coverage.

If you are involved in a hit-and-run accident, you can file a claim against your uninsured motorist coverage, although it's worth noting that uninsured motorist property damage coverage may not be applicable in all states for these incidents. In such cases, you would need collision coverage for your insurance to cover the damage to your vehicle.

While not all states mandate uninsured/underinsured motorist coverage, it is a crucial form of protection that can provide financial peace of mind in the event of an accident. Without it, you could be left facing significant expenses, even if you file a claim against your own policy, as you may have a large collision deductible or insufficient medical payments/personal injury protection.

When purchasing uninsured/underinsured motorist coverage, you can usually choose the insurance limits of your coverage. It is recommended to match the amount of your liability coverage for bodily injury protection and select a limit that closely mirrors your vehicle's value for property damage protection.

Gap insurance

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. This type of insurance is intended to cover the loss you would suffer if your loan balance is higher than the value of the vehicle.

You may also be able to get a refund if you sell, refinance, or prepay your auto loan. Gap insurance does not cover other property or injuries resulting from an accident, nor does it cover engine failure or other repairs.

Frequently asked questions