Car insurance for financed vehicles

Car loans or leases can be a helpful means of obtaining a vehicle, but if you’ve never taken out an auto loan before, you might not know what to expect from the process. Although having a vehicle loan or lease won’t directly impact your car insurance, the conditions of your financing often affect the coverage types and levels you are required to purchase. Bankrate explains the nuances of car insurance for financed vehicles to help you feel more confident in your insurance choices.

Do I need car insurance if I have a car loan?

When you have a car loan or lease, 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 its investment is protected through physical damage coverage on the vehicle. Because of this, comprehensive coverage and collision coverage are generally required for car insurance on financed vehicles. 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 does insurance cost for a financed vehicle? 

The national average cost of car insurance is $2,014 per year for full coverage, based on rate data collected from Quadrant Information Services. While the average cost of minimum coverage is much cheaper at $622 per year, financed vehicles typically require 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.

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 for financed vehicles is typically more expensive than carrying state minimum liability, there are ways you might 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 coverage based on their proprietary underwriting formulas, so comparing quotes may help you find the cheapest auto insurance company for your needs.
• Consider your vehicle type: The vehicle you choose will impact your car insurance rates. Makes and models that are considered luxury vehicles, sport cars or foreign brands may see higher car insurance rates as they may have a higher value, be seen as riskier to insure and have higher repair costs. 
• Look for discounts: While you’ll receive a base rate based on your personal factors, auto insurance discounts may help lower your total premium. Each insurer typically offers at least a few, and common ones include bundling, insuring multiple vehicles, and being accident- or claims-free. By making sure you apply all of the discounts you are eligible for to your policy, you might help ensure you are paying the lowest premium possible with your insurer. 
• Drive safely: Having a history of tickets, at-fault 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 may 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 will likely lower your premium, since you are willing to take on more of the financial risk if you have damage. However, most insurance professionals recommend choosing levels you can afford to pay out of pocket on short notice. 

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

Frequently asked questions