If you have an auto loan, you might wonder if you need full coverage. Full coverage is a requirement with most auto loans and failing to carry it can be costly. Fortunately, you can use this guide to learn how you can save on a full coverage policy.
Do I Need Full Coverage on a Financed Car?
Most lenders will require you to carry full coverage on a financed car. This protects their investment in the event that you are in an accident and the vehicle is totaled, or if it is stolen, and you can no longer afford to make the monthly payments.
This is because liability insurance, also known as minimum coverage, only covers the damages that you are responsible for with another driver. It does not cover your own damages. If you are in an accident and you are responsible, minimum liability insurance will not provide you with any compensation.
Most lenders require that you show proof of full coverage before you can even leave the dealership with your new vehicle. They will also continue to check that you carry full coverage throughout the loan.
What Is Full Coverage Auto Insurance?
Full coverage is in addition to minimum coverage. It includes:
- Comprehensive coverage: Comprehensive coverage provides compensation if your vehicle is totaled due to a non-accidental cause or if it is stolen.
- Collision coverage: Collision coverage provides compensation if you are in an auto accident, regardless of who is at fault.
- Liability insurance: Liability insurance is the minimum insurance set by the state in which you live. It covers damages that you cause to someone else’s vehicle.
To legally drive in your state, CarInsurance.com states that you must have at least liability insurance. A full-coverage policy is also a requirement but the specific coverages will vary from provider to provider.
A full-coverage policy may also include roadside assistance or gap insurance. Roadside assistance provides you with towing or tire repair assistance if stranded. Gap insurance covers the difference between the insurance payout following an accident and the current value of your vehicle.
Gap insurance may or may not be required, but is good to consider. It is possible for your vehicle to decrease in value faster than the time it takes for you to pay it off. Without gap insurance, you could be left paying off the difference if you are in an accident.
What Happens If You Don’t Have Full Coverage on a Financed Car?
Failing to carry full coverage on a vehicle that you finance can be costly. When you borrow funds to buy a car, you sign a contract that stipulates that you will carry full coverage. If you reduce coverage or drop insurance altogether, you are technically violating that contract.
The lending company will usually respond in one of two ways:
- Cancel your auto loan: According to Clovered, your lender may have the right to cancel your auto loan and repossess your vehicle.
- Purchase insurance on your behalf: In most cases, the insurance company will purchase insurance on your behalf. This policy will usually be much costlier than if you purchased your own policy. Additionally, the lender will add the monthly cost of insurance to your auto loan. If you don’t pay it, they can repossess your vehicle.
It is also possible that the lender does not notice that you remove coverage. In this case, you are at risk if you’re in an accident or if your vehicle is stolen. You could be required to continue making payments on your vehicle, even if your car is totaled or stolen.
How to Buy Insurance for a Financed Car
Buying insurance for a financed car is the same process as buying it for any car. Once you evaluate your coverage needs, contact a few insurance providers and find out how much they charge. Choose a policy that meets your budget, as well as your lender’s requirements. If you have any questions as to what the policy covers or if it meets your lender’s minimum coverage rules, it is always a good idea to reach out to the lender.
Your Options Once You Pay Off Your Financed Car
You may have more insurance options available once you pay off your financed car. You no longer have to follow the lender’s requirements for insurance. However, you may still want to carry full coverage. While the cost of auto insurance is not affected based on whether you owe money to a lender or not, you may have more options available to adjust your coverage levels for a more affordable payment.
Before shopping around for insurance once you have paid off your vehicle, be sure to remove the lender as a lienholder. This can make shopping around easier and make it less confusing to submit an insurance claim. Then, choose the best insurance provider with the following tips:
- Request quotes from numerous providers: Requesting quotes from numerous providers is one of the best ways to understand what you can expect to pay.
- Inquire about insurance discounts: Policy discounts can help you save a significant amount each month. Find out if the different providers offer discounts like multi-policy or multi-vehicle.
- Adjust your insurance levels: While paying off a loan does not necessarily mean that you should drop coverage to the lowest level, it does mean that you have more flexibility.
- Adjust your deductible: A deductible is an amount that you have to pay before your insurance company covers any damages. Adjusting your deductible can affect your monthly payments. A higher deductible means lower monthly payments and vice versa.
If you do decide to adjust your insurance levels or deductible, be sure to consider what this means if you have to file a claim.
Full coverage is a requirement if you have an auto loan. However, there are still ways that you can save and get the best rates on your insurance policy. Check this out if you need additional information, resources, or guidance on car insurance.
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