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Car insurance for financed vehicles

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Auto insurance for financed cars may look different than if you own the car outright. With a lender involved, there are requirements that must be met to satisfy the loan, often including the need for full coverage auto insurance. With full coverage, there are deductibles to choose and add-on coverages to consider to help protect the bank’s investment.

A financed car is one where you take out a loan until it is paid off, and then own it. This is different from a leased car, where you have a car payment for a specific length of time before returning the car to the dealer.

What insurance is required for a car loan?

Lenders that require full coverage car insurance do so to provide valuable physical damage protection for the vehicle. If the car is damaged in an accident or by a covered peril, you only have to pay the deductible to get it fixed and the insurance company pays the rest. Full coverage is not only a way to protect the loan, but it also provides a benefit to the driver by not having to pay the full cost of car repairs.

  • Liability coverage: Liability insurance pays up to the selected limits on your car insurance policy for bodily injury and property damage you cause to others in an accident.
  • Collision coverage: Collision coverage goes into effect if your car is damaged in an accident and needs to be repaired, regardless of who is at fault.
  • Comprehensive coverage: Also called other-than-collision coverage, comprehensive coverage pays for covered perils that collision does not, like weather events, broken glass and hitting an animal.

Almost every state has minimum car insurance requirements that must be met to legally drive a vehicle on the road. You can also choose optional coverages like rental car reimbursement, which pays for a rental while yours is being fixed after a covered claim. Other options like roadside assistance pay for things like key lockout, running out of gas or towing after your car has broken down.

How much is full coverage 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, car insurance for financed vehicles will likely require full coverage insurance to meet the loan requirements. If you do not meet the car loan insurance requirements, it can lead to force-placed insurance, which is usually much more expensive than purchasing full coverage on your own and only protects the lender.

Average annual premium for minimum coverage Average annual premium for full coverage
$565 $1,674

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. 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.

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.

Financed car common terms

Term Definition
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 of the loaned amount the bank charges you on top of your loan. 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.
Title The title is the legal document containing information about the car like the VIN, make, model, color, mileage and vehicle owner, including the lender. Depending on your state, the lender may hold the title until the vehicle is paid in full.

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.

  • Increase deductibles – The higher your deductible for comprehensive and collision coverage, the less you have to pay on your car insurance premium. If you want to raise your deductibles, it helps to consider how much you can comfortably afford out of pocket in case of a claim.
  • Shop around – Shopping for auto insurance regularly is another way to potentially save on financed vehicle car insurance. You can compare the same coverage limits with different companies to find the cheapest rate.
  • Pay in full – If an insurance company charges installment fees, you can save by paying in full. Some companies even offer a paid in full discount, which can save you even more money.
  • Drive safe – Avoiding accidents and tickets can keep the cost of car insurance low. Most auto insurance companies also offer safe driving discounts.
  • Consider telematics tracking – With safe driving practices, you can usually save on premiums by allowing the insurance company to track your driving habits. Telematics analyze your speed, braking, mileage and other factors to determine your car insurance savings.

Frequently asked questions

What happens if you total a financed car with insurance?

If you total a financed car with insurance, you still owe the balance of the loan. While the insurance company will pay the market value, there may still be a remaining loan balance. In this instance, having gap insurance may be beneficial This optional coverage is often worth considering for financed or leased vehicles.

What is the best car insurance for a financed vehicle?

The best car insurance policy is one that fits your budget and has the coverages you need. By shopping around for quotes, you could find the best company rates without sacrificing coverage. Adding discounts is another helpful way to get coverage for cheaper rates.

What happens if you do not pay insurance on a financed car?

Similar to not meeting car loan requirements, lenders can add force-placed insurance when premiums are not paid on time and your auto insurance lapses. For this reason, lenders usually request to be added as a loss payee on a policy, in which case the insurance company notifies the lender if the insurance lapses, cancels or renews.

When should you drop full coverage on your car?

The choice to drop full coverage car insurance is a personal one if you do not have a financed vehicle. At some point, the book value of an older car may no longer outweigh the cost of car insurance, in which case you may consider dropping full coverage. However, if you cannot afford to fix your car in the event of an accident, you may consider keeping full coverage until you can.


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 coverages that meet 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.

Written by
Mandy Sleight
Insurance Contributor
Mandy Sleight has been a licensed insurance agent since 2005. She has three years of experience writing for insurance websites such as, MoneyGeek and The Simple Dollar. Mandy writes about auto, homeowners, renters, life insurance, disability and supplemental insurance products.
Edited by
Insurance Editor