If you are planning on financing a car, it is crucial that you have the right auto insurance coverage. You will need to have full coverage if you finance a car. Read on to discover why you need this level of coverage, what you are likely to pay and what happens if you don’t have full coverage.
You should be able to find full coverage insurance that fits your budget, especially with the help of our expert research. We carefully reviewed all the major auto insurance providers to find the best car insurance companies.
Do I Need Full Coverage Insurance to Finance a Car?
The simple answer is yes, you need full coverage insurance to finance a car. You will also have to keep that full coverage throughout the entire loan period.
As a refresher, full coverage refers to when you have liability insurance, comprehensive coverage and collision coverage.
The reason that lenders require collision and comprehensive insurance is simple. These options will pay to fix the vehicle if you are responsible for a car accident or if your car gets damaged by the environment or another object.
Why You Need Full Coverage Insurance to Finance a Car
The reason you need full coverage insurance to finance a car is fairly straightforward. When you finance a car, the lender buys the vehicle and owns it. You are paying the lender back, and until you pay it off completely, the lender still owns at least a portion of it.
By requiring full coverage, the lender protects their investment in case you get in an accident or your car is otherwise damaged.
Minimum Coverage Isn’t Always Enough
If you are familiar with minimum coverage requirements, you will notice that full coverage is more than this.
Depending on the state you live in, the minimum auto insurance requirement may include the following:
Liability coverage – This pays for damage to other vehicles as well as other people’s medical bills if you cause an accident.
Uninsured or underinsured motorist coverage – This pays for your medical bills and damage to your vehicle if you are in an accident caused by someone without any insurance or without enough coverage to cover the costs.
Medical payments (MedPay) or personal injury protection (PIP) – These cover your medical bills that result from an accident.
You will notice that none of the above-mentioned minimum requirements will pay for damage to your car if you are responsible for the accident. That missing coverage is why the minimum is not enough when financing a car.
What Full Coverage Includes
Since you won’t be able to finalize a car loan without full coverage, you should know what it includes. After all, you may also notice differences to your deductible or insurance premium with full coverage versus less coverage.
As mentioned, full coverage car insurance includes liability, comprehensive and collision elements. Liability coverage pays for damage to someone else’s vehicle or their medical bills from bodily injury if you are at fault.
Collision coverage will pay for repairing or replacing your car if you get in an accident with another car. It can also pay for property damage to fences or other objects that you inflict when you are behind the wheel.
Comprehensive coverage provides protection against a range of situations where your car may be damaged without an accident actually occurring. Examples include coverage for vandalism, riots, theft, fire, floods and other environmental damage.
The combination of a full coverage auto insurance policy ensures that the car will be repaired if you cause it any damage. This is important because the car will still be the lender’s property until you pay off the entire loan.
Adding Gap Insurance Can Be Useful
Some, but not all, auto lenders may require gap insurance. Even if they don’t require it, it can be incredibly useful and financially savvy to get this coverage.
To understand gap insurance, remember what happens if your financed car is in an accident. The policy lists the lender as the loss payee. That means that if your car is totaled, the lender receives the settlement (at least up to the amount you still owe them).
The caveat is that your insurance company will only pay the lender the fair market value or actual cash value of your car. This means that if your totaled car is worth less than you owe the lender, the lender will not receive everything they are owed. You will still owe them a balance.
Gap insurance takes care of this by covering the difference between what is left on the loan and the car’s market value. That is why some lenders require gap insurance. They want to ensure that they receive all the money you owe them.
As mentioned, even if a gap car insurance policy isn’t required, it can be smart to have in many situations. This is especially true if you are financing a new car (as opposed to a used one) with a five-year loan. If you were in an accident within the first year or two, you would likely still owe more than the car is worth.
What Happens If You Don’t Keep Full Coverage on a Financed Car?
Do not stop your full coverage part way through your loan. You will not be able to hide this change in coverage from your lender because it appears on your insurance policy. As such, your insurance provider will tell your lender about any coverage changes.
There are a few potential outcomes if you drop below full coverage. Your lender may require you to pay off the entire balance you owe on the loan. Alternatively, your lender may repossess the vehicle.
In the best-case scenario, you would still be responsible for any physical damage to the car that you cause or that is caused by the environment.
How Much Full Coverage Insurance Costs
Since you can’t leave the dealership with a financed vehicle without full coverage auto insurance, you should have an idea of expected costs.
To give you an idea of what full coverage insurance costs, consider the average prices paid in 2018. The Insurance Information Institute (III) shares data for liability, collision and comprehensive insurance.
Comprehensive – $167.91
By adding those together, you get the average amount paid in 2018 for full coverage insurance, which is $1,189.64.
Remember that your car insurance rates will also depend on various factors, including your credit score, claim history and driving record.
Our Recommendations for Auto Insurance
After our extensive research, we suggest you consider auto insurance from USAA or Progressive. Both of these companies offer gap insurance.
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USAA earned a rating of 9.3 for industry reputation, a 10.0 for cost, and 9.3 for customer experience. USAA also offers numerous discount options, including military installation, length of membership, vehicle storage, new vehicle and good student discounts.
Progressive: 9.1 out of 10.0
Progressive earned a 9.1 for industry reputation, with a 9.0 for coverage, a 9.3 for cost, and an 8.9 for customer experience. Progressive has its own set of useful discounts, including for automatic payment, homeowners, teen drivers, multiple policies and continuous insurance.
FAQ: Full Coverage Insurance on Financed Car
How much coverage do I need for a financed car?
You will need full coverage for a financed car.
What happens if you drop full coverage on a financed car?
If you drop full coverage on a financed car, your lender can repossess the car or require you to pay the entire balance of the loan. At the very least, you will be responsible for all damage.
Can I just get liability insurance on a financed car?
No, financed cars also require collision and comprehensive insurance.
What happens if you finance a car and don’t get insurance?
You are unlikely to be able to finance a car without insurance because the lender will not approve the loan.