How Having An Auto Loan Affects Your Car Insurance Rates

How does car insurance work for financed cars?

Well, the time has finally come. You’re ready to bid farewell to your first car and say hello to a new set of wheels. While it would be nice to walk into the car dealership and pay for your new car in cash, you’ve decided to take the tried and true auto loan route.

If it’s your first time taking out a loan, you may wonder how having an auto loan will affect your insurance rates. Here is an overview of what to know about financed car insurance coverage. 

What Kind Of Coverage Do You Need for a Financed Car?

Before you can take your new wheels home, you’ll need to have the minimum amount of coverage for a financed car. Since you are borrowing the money from a lender to buy your car instead of purchasing it outright, this means that the lending party now has a vested interest in your vehicle. This puts you in a higher risk category. As a result, dealers will require you to have collision, comprehensive, and liability insurance before driving your car off the lot. 

Insurance Requirements on a Financed Car

A financed car required the following three types of insurance: 

    1. Liability insurance: Liability insurance pays for the other party’s damage and injuries in an accident where you are at fault.
    2. Comprehensive insurance: Comprehensive insurance covers your car’s damage from the elements, theft, or animal collision.
    3. Collision insurance: Collision insurance pays for the damage inflicted to your car in a collision or an instance where you cause damage to your vehicle — for example, backing into the garage or hitting a pole.

What Happens if you Don’t have Full Coverage on a Financed Car?

If you fail to keep full coverage on your financed car, you could be stuck with paying for the total amount in case of theft or an accident. 

Removing full coverage from your financed car also puts you at risk of violating your auto loan agreement. Lenders typically state in the contract that full coverage must be maintained on the vehicle for the entire duration of the loan. Whether you miss payments or intentionally cancel the coverage, breaching this contract could cost you your car.  

Some lenders extend drivers the courtesy to reinstate their full coverage if it’s been canceled. If you choose not to, your lender will add single interest coverage, otherwise known as forced placed insurance, on top of the existing loan amount. This coverage is expensive, and it only covers the lender, not you. 

While the decision is ultimately up to the driver, it’s in your best interests to maintain full coverage of your financed car until the loan is paid in full. Once your car is paid off, then you have a bit more flexibility.

Tips For Buying Full Coverage Car Insurance

No matter what car insurance company you choose, overpaying for your premiums is the last thing you want. Each driver has unique needs, and what works for one could be impossible for another. If you’re unsure where to start,  here are a few tips for buying full coverage car insurance to help you get the best deal. 

1. Choose the right types of insurance.

Choosing the right type of insurance ensures full protection for you and your vehicle in case of an accident. With a financed car, you will always need full coverage, which consists of liability, comprehension, and collision coverage.

However, some drivers choose to opt for additional coverage, such as uninsured motorist or personal injury protection coverage. This additional insurance protects your car on all fronts, whether it’s stolen, a tree falls on it, or you get into a fender bender. 

Your insurance company may also offer you a slew of add-ons like roadside assistance or glass breakage. While these add ons aren’t necessary, understanding all the insurance components will help you pick the right insurance policy for you. 

2. Choose the right coverage limits.

Before you decide on coverage limits, it’s essential to understand the three parts of an auto insurance coverage policy. They are as follows:

  • Bodily Injury Liability Per Person: deals with the maximum payout of medical bills to a person whose accident you caused
  • Bodily Injury Liability Per Accident: maximum paid out to people in an accident where you are at fault
  • Property Damage Liability Per Accident: coverage paid out for damages to other’s property in an accident

Remember that these limits vary from state-to-state. While some states like Florida have no minimum requirements, states such as Maine or Alaska require up to $50,000 per bodily injury per person and $100,000 bodily injury per accident. If you end up moving halfway through your loan, you’ll need to check your new state’s coverage limits to make sure you meet these new standards.

Keep in mind, though, that each lender may have unique requirements for coverage limits. Even if you meet the lenders and state requirements for minimum coverage, each driver should ensure that they are adequately protected with the amount of coverage they have. 

3. Choose the right deductibles.

Choosing the right deductible amount can help you save money on full coverage car insurance. Your deductible is the amount you pay out of pocket before your insurance pays the rest. Let’s say you get into a collision and the damage is worth $1,200. If your deductible is $500, you’ll pay that amount yourself, and your insurance will pay the remaining $700. 

Before changing your deductible amount, take time to think about your current financial situation. Are you financially stable enough to take care of small issues yourself without filing a claim? Will you have enough money to pay for the damages resulting from a claim in case of an accident? If the answer to these questions is yes, raising your deductible can end up saving you cash now and in the future. 

Do You Need Gap Insurance on a Financed Car?

Gap insurance is a form of coverage that kicks in when your car is totaled, but you still have a remaining balance on your loan. Imagine that you have an auto loan for your car worth $15,000. A year into your loan, you get into a collision, and your car is totaled. At this point, the car’s actual cash value is $11,000, but you still owe $13,500 on your loan. You are now left paying a $2,500 bill for a car you no longer drive. 

In this case, gap insurance would cover that $2,500 bill for you, leaving you free to purchase a new car. You can buy gap insurance from your insurance company or a dealer, although it’s cheaper to go through your insurance company. 

Compare the top car insurers to get a better idea of how much your gap insurance will cost. 

How to Get Cheap Car Insurance for Your Financed Vehicle

If you need some extra help finding cheap car insurance for your financed vehicle, here are a few tips tactics to implement:

Pay Upfront

Paying your insurance premium upfront may put a considerable dent in your savings, but it can save you money in the long run. Once this monthly payment is taken care of, you can focus on paying down your car loan. If paying the entire sum upfront is too much for you, you can opt to pay with electronic transfers out of your bank account or EFT.

Bundle Your Policies

Bundling your policies with renters or homeowners insurance can help you save money on auto insurance. Opting for a bundle can save you up to 25% on each policy compared to buying them separately. Bundling policies makes you a more valuable customer to insurance companies, which means they’re less likely to drop you after you file a claim or some knocks to your driving record. 

Practice Safe Driving Habits

Although you can’t control other drivers’ actions on the road, you can manage your own. One way to practice safe driving habits is to pick up a few defensive driving tips. This kind of driving will help you reduce accidents and reduce risks while on the road. The sooner you can identify problems while driving, the sooner you can avoid them — and the better your driving will become. 

Some insurance companies even offer discounts for drivers who complete defensive driving courses. If these are provided in your area, it may be worth signing up. 

Consider Telematics or Pay-Per-Mile Insurance

Do you live in a big city and rely on public transportation during the week? If so, you stand to lower your car insurance rates by choosing telematics or pay-per-mile insurance

Pay-per-mile or usage-based insurance is what it sounds like – an insurance plan based on how many miles you drive. In this plan, you’ll start with a base rate based on the standard factors that influence your car insurance rates, such as your age or driving record. Then, a mileage rate of a few cents is added on top. Your mileage is tracked by submitting photos of your odometer or by a tracking device installed in your car. At the end of each month, your mileage and base rate are combined for a final bill. 

While telematics programs also track the number of miles you drive, they go a step further. These wireless devices collect data about your driving habits. They follow how often you brake, the time of day you drive, right and left turns, and more. This data is turned over to your insurance company. Based on your driving habits, you can qualify to receive discounts and deals over time. 

Compare Rates From Multiple Companies

Before deciding to purchase a policy, it never hurts to compare rates from multiple companies. Be sure that your car insurance quotes contain the same coverage types and limits so that you can get the most accurate numbers. 

Even if you love your current insurance company, it pays to compare car rates every six months to make sure that you’re still getting the best deals. If you’ve had any significant life changes during that time, such as getting married or moving, you’ll be surprised to see how this affects your insurance premium. By shopping around, you stand to save hundreds of dollars in car insurance rates. 

Financed Car Insurance FAQs

Is insurance more expensive for financed vehicles? 

Put simply, no, it isn’t. Although your insurance rate is reflective of several factors, it won’t change based on the status of a leased or financed vehicle. If you feel that your insurance is on the pricier side, this is because of the lender’s requirements that your insurance fully covers your financed car. 

When you finance a car, does it include auto insurance? 

The initial financing of a car will not include auto insurance in the cost. You’ll have to factor in the price of auto insurance in yourself. While you can get full coverage insurance through your dealer, most drivers choose to get full coverage through their existing insurer. 

Do you have to get full coverage on a financed car? 

Yes, anyone who has a financed vehicle will need to acquire and keep full coverage for the entire duration of their loan. Any vehicle that has a loan balance still belongs to the lender. Lenders will require clients to maintain full coverage on a loan to protect their investment, with possible penalties for dropped coverage.

Should you drop full coverage after you pay off your loan? 

After making that final loan payment, many drivers rush to drop their comprehensive or collision insurance. However, this may not be in your best interest. Although your obligation to your lender is gone, your car still has significant worth. If you are in a car accident and your vehicle is heavily damaged, can you afford to replace it? If your answer is no, perhaps maintaining full coverage isn’t such a bad idea after all.  

What’s the difference between leasing and financing a car? 

The main difference in leasing and financing a car is the ownership of the vehicle. When you lease a vehicle, you make monthly payments for your lease duration and return the car at the end of your leasing period. On the other hand, when you finance a vehicle, you make payments to own the vehicle over time. Throughout your car loan, the payments you complete count towards your ownership of the car. At the end of the loan period, the car is yours. When the vehicle is leased, it’s the dealer’s.

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