Last Updated on November 14, 2019
Most people who purchase cars are going to use a financing option to secure a car for themselves. With financing, this means they are going to make monthly payments to either a bank, private lender or the dealership. Regardless of whether you use financing or not to purchase a vehicle, you are still required to have full car insurance coverage for that vehicle. Every state has their own requirement for the minimum amount of liability insurance that you need to have. There is no special waiver for this requirement if you’re financing your vehicle. The state law applies either way.
Lender Car Insurance Requirements
When you obtain auto financing through a lender, they are going to have their own requirements for the amount of car insurance coverage that you have. Not only are they going to specify the minimum amount of liability insurance that you must carry, they are also going to require you to have a certain amount of comprehensive insurance coverage and collision insurance coverage. Comprehensive and collision are known as “full coverage.”
Full coverage is not something that states require you to have because it only concerns the coverage to your own vehicle. While this might not be a big concern to the state regulators, it is a big concern to the lender that financed your vehicle for you. They want to make sure that if you get into an accident which destroys your vehicle, then you will have the money from the insurance to either fix the vehicle and/or pay off the outstanding lien on it. Otherwise, they would lose the money they lent to you and would have no car to repossess for collateral.
Breaking the Lender’s Car Insurance Requirements
You need to be careful when changing or canceling your car insurance coverage on a vehicle that still has an outstanding lien on it. If your lender ever finds out that your car insurance coverage does not fulfill the terms and conditions of the financing contract that you signed with them, they could have the legal right to repossess your vehicle until you do get the proper coverage. Either that or the lender will purchase car insurance coverage for your vehicle on your behalf, which is known as “force-placed insurance.”
Once you have force-placed insurance, this will result in an additional premium with interest being added to your monthly car payment. The worst part is that force-placed insurance does not offer any coverage to you as the driver. It only offers coverage to the lender. So, not only will you be paying more money every month for car insurance, you won’t even get the coverage that you would have gotten if you had just maintained the proper amount of car insurance coverage on your own. Therefore, it is better to be responsible with your insurance coverage, so you don’t end up in this situation. Make sure you read your financial contract again to ensure that you’re getting the right amount of coverage.
Read also: 5 Tips for Buying Your New Pickup Truck
What you need to remember is that a financed car is not your car. You will not possess legal ownership of your vehicle until the loan is paid off. For most people, this will take at least 6 years of making monthly payments to the lender before this happens. After that has happened and you’ve obtained the actual ownership title to the vehicle, then you can decide how much collision and comprehensive coverage you should have. This full coverage should only be equal to the current value of your vehicle, so it won’t necessarily be as much as you were paying before. But you will still be required to have liability coverage because that is a state requirement for everybody.