Car loans or leases can be a helpful tool to obtain a vehicle, but if you’ve never taken out an auto loan before, you might not know what to expect from the process. And although you might not think that a loan or lease has much to do with your car insurance, the conditions of your financing often affect the coverage types and levels you are required to purchase. Bankrate can help explain the nuances of car insurance for financed vehicles so you can feel more confident in your insurance choices.
What insurance is required if you have a car loan?
When you have a loan or lease on your vehicle, your financial institution will likely require that you carry full coverage insurance. This is because you do not technically own your vehicle — your lender or lessor does. If the vehicle is damaged or totaled, the financial institution needs to know that you’ll be financially able to repair the damage or pay off the loan. Because of this, comprehensive coverage and collision coverage are generally required if your vehicle is financed. Lessors also generally require higher levels of liability coverage. Generally, the following types of car insurance coverage are required when you finance a vehicle:
- Liability coverage: Liability insurance pays up to the policy limits for damage and injuries that you cause to others. Liability coverage is split into two parts: bodily injury liability and property damage liability, both of which generally have minimum limits required by law.
- Collision coverage: Collision coverage is designed to pay for damages that occur from collisions, including with other cars and stationary objects, regardless of who is at fault.
- Comprehensive coverage: Also called other-than-collision coverage, comprehensive coverage is designed to pay for non-collision damage, like animal damage, theft, storm damage and vandalism.
Almost every state has minimum car insurance requirements that you must meet or exceed to legally drive. Your lender or lessor will likely have its own requirements in addition to the state minimum requirements. You can also choose to add optional coverage types, like gap insurance coverage, which could help you pay the difference between your loan amount and the cash value of your vehicle if it is totaled.
How much is full coverage car insurance for a financed vehicle?
The cost for full coverage varies based on a number of factors, but the national average cost of car insurance is $1,674 per year, according to Bankrate’s 2021 study of quoted annual premiums. While the average cost of minimum coverage is much cheaper at $565 per year, financed vehicles are very likely to need full coverage insurance to meet the loan or lease requirements.
You should know that if you do not meet the insurance requirements set forth by your lender or lessor, your financial institution could take out force-placed insurance on your behalf. This means that a lender or lessor is buying a policy for you to cover the requirements of the loan, and the lender or lessor will generally add the cost of the policy to your monthly debt repayment. Force-placed insurance is often much more expensive than if you were to buy a policy on your own.
|Average annual premium for minimum coverage||Average annual premium for full coverage|
Is it cheaper to insure a leased or financed car?
Whether you finance or lease your vehicle, the cost of car insurance will not change based solely on the financing status. However, you may pay more on your auto loan insurance to meet the lender’s requirements, such as purchasing full coverage, than you would if you owned the car outright and chose less coverage or liability-only insurance. That being said, even if you own your car with no loan or lease, you may still want to purchase full coverage for the additional financial protection that it offers.
Ways to save on auto insurance for financed vehicles
Though paying for full coverage car insurance is typically more expensive than state minimum liability, there are ways to save on auto insurance while still meeting loan requirements.
- Shop around: Shopping for auto insurance could potentially net you a lower premium. Car insurance companies all charge different rates for the same coverage, so comparing quotes could help you find the cheapest auto insurance company for your needs.
- Consider how you pay: Many insurance companies offer discounts if you pay your premium in larger installments, especially if you pay in full. If you do prefer to pay monthly, signing up for automatic payments could lower your bill.
- Drive safely: Having a history of tickets, accidents or DUI convictions could make insurance companies view you as a high-risk driver. Even if you aren’t technically high risk, you’ll likely see a surcharge on your policy for driving incidents.
- Consider telematics tracking: Car insurance telematics programs are becoming increasingly popular and available. These programs track your driving habits — usually including the hours you drive, your speed, hard brakes, rapid accelerations and idle time — and could earn you a personalized discount if you are a safe driver. Make sure you understand your company’s regulations, though, as some carriers will increase your premium if the data reveals unsafe driving practices.
- Increase deductibles: Your deductible is the amount you will pay if you file a claim for damage to your car. Full coverage has two car insurance deductibles: one for comprehensive and one for collision. Increasing your deductibles can lower your premium, since you are willing to take on more of the financial risk if you have damage. Your collision deductible generally has more of an impact on your premium than your comprehensive deductible does. However, make sure you choose levels you can afford to pay before you make any changes.
Terms to know when financing a car
When you finance or lease a car, there are several terms you should become familiar with. These terms will typically be listed on your financing or leasing agreement and dictate how much your car payment will be, including how the lender came up with that number.
Common vehicle financing terms
|Principal||The principal is the total amount you are financing for the car, before interest and fees.|
|Interest rate||The interest rate is the percentage that a financial institution charges for borrowing money. You will pay back the principal plus interest and any other fees assessed by the lender.|
|APR||The annual percentage rate (APR) is how much you pay to borrow money each year for your car, including interest and fees. If there are no fees, your APR may be the same as the interest rate percentage.|
|Lender||An auto loan lender could be a bank, credit union, car manufacturer or finance company that agrees to lend you the money to buy a car.|
|Lessor||A lessor is the company from which you are leasing a vehicle. This could be a vehicle manufacturer, dealership or other financial institution.|
|Title||A vehicle title is a legal document that contains information about a vehicle and its ownership. Information included on titles ranges from the vehicle identification number (VIN); the year, make and model of the vehicle; and the vehicle owner and lending institution.|
Frequently asked questions
What happens if you total a financed car?
If you total your financed vehicle (or if it’s stolen), you’ll first likely want to file a car insurance claim. Your insurance company will then examine the situation and pay you out the cash value of the vehicle. The check will likely have both your name and your lender’s name on it, and you’ll need to work with your lender to cash the check and send in the funds to pay off the loan. If the cash value of your insurance payout isn’t enough to pay off your loan, you may need to pay the difference out of pocket, unless you purchased gap insurance.
What is the best car insurance for a financed vehicle?
The best car insurance company is one that fits your budget and has the coverage types you need. By shopping around and getting multiple quotes, you may be able to compare auto insurance premiums, coverage types, discounts, policy features and third-party ratings to find the insurance provider for your situation.
What happens if you let your financed car insurance lapse?
When you have a loan or lease on a vehicle, your lender or lessor will be listed on your insurance policy as an “additional interest.” This means that the finance company will be notified when the policy renews and if it lapses. If you have a lapse in coverage, a finance company will likely notify you and advise that you have a certain amount of time to provide proof of new insurance. If new insurance is not obtained, the lender or lessor will likely add force-placed insurance to your loan.
Do I have to have full coverage on my car?
If you have an active loan or lease, then yes, you very likely have to carry full coverage. If you own your car outright, you have the option of choosing which coverage types to purchase, so you could buy a liability-only policy. However, keep in mind that full coverage provides coverage for damage to your vehicle. If you do not have the funds to comfortably repair or replace your vehicle if it is damaged or totaled, you may still want to keep full coverage. If you aren’t sure what level of coverage is right for you, talk with a licensed insurance agent.
Bankrate utilizes Quadrant Information Services to analyze 2021 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on a 40-year-old male and female driver with a clean driving record, good credit and the following full coverage limits:
- $100,000 bodily injury liability per person
- $300,000 bodily injury liability per accident
- $50,000 property damage liability per accident
- $100,000 uninsured motorist bodily injury per person
- $300,000 uninsured motorist bodily injury per accident
- $500 collision deductible
- $500 comprehensive deductible
To determine minimum coverage limits, Bankrate used minimum coverage that meets each state’s requirements. Our base profile drivers own a 2019 Toyota Camry, commute five days a week and drive 12,000 miles annually.
These are sample rates and should only be used for comparative purposes.