Do You Need Full Coverage on a Financed Car?

Buying a financed car is exciting, but you’re responsible for both the auto loan and car insurance coverage. Although some drivers prefer liability only, lenders often have different expectations. After all, they have a financial stake in your vehicle. But does that mean you mandatorily require full coverage? Or can you get by with just the state’s minimum insurance requirements?

No states require drivers to carry collision and comprehensive coverage, yet lenders might insist on it. Because they want to protect their investment and ensure the loan is secured. But what if you decide to drop certain coverages? Could it lead to repossession or are there ways to maintain these insurance policy terms wisely? Keep reading this article to learn everything about whether you need to carry full coverage insurance on your financed car.

Financed Car Insurance Requirements 

When you finance a vehicle, you don’t fully own it yet. The financial institution or lender holds a stake until you pay off the loan. That’s why, they often have specific auto insurance requirements so that they can protect their investment.

Auto loan insurance requirements are as follows:

1. Liability Insurance: If you own a vehicle, whether financed, leased, or bought outright, liability insurance is mandatory in 49 states in the U.S.A. Only in New Hampshire, liability insurance isn't required, but you must show you can pay for damages (Bodily Injury, Property Damage) if you cause an accident.
2. Collision and Comprehensive Insurance: State laws don’t require it, but most lenders require you to carry both collision and comprehensive insurance. If your vehicle is damaged or totaled in an accident/collision, these coverages pay the repair or replacement costs.  
3. Gap Insurance: Sometimes your lender may require gap insurance as well. This coverage makes sure you aren’t left with any unpaid loans if your vehicle gets stolen or totaled. If this happens, gap insurance pays the difference between the remaining loan balance and the car's actual cash value.
4. Uninsured and Underinsured Motorist Coverage: Some lenders even require uninsured or underinsured coverage to cover damage caused by uninsured drivers.

So, before signing a contract, review the car insurance requirements. That way you can avoid any surprising costs or penalties.

Also, you can learn more about different types of car insurance coverage so that you can choose which coverage is right to have when you have a financed car.

Do You Have to Have Full Coverage on a Financed Car?

Whether you need full coverage on a financed car or not depends on your lienholder. In most cases, the answer is yes. You must have full coverage on a car purchased with an auto loan. In fact, lenders almost always require full coverage when you finance a vehicle.

Full coverage car insurance is typically comprised of liability, comprehensive and collision insurance coverage. Liability is always mandatory which you must carry as proof of your insurance. In the case of comprehensive and collision, both these coverages pay for damages caused by collisions and non-collision events.

Full coverage (comprehensive and collision) protects your financed car from most unforeseen incidents. That’s why a lender or financial institution requires you to carry it until you pay off the loan.

If your financed vehicle gets severely damaged or totaled by any of the following incidents, you’ll get compensation under collision coverage:

• Car accidents with another vehicle
• Collisions with stationary objects (e.g., trees, poles)
• Single-vehicle accidents (e.g., hitting a guardrail)
• Pothole damage
• Rollovers

If your financed car gets damaged or totaled by any of the following events, insurers will pay the cost of repairing or replacing the vehicle under comprehensive coverage:

• Theft
• Vandalism
• Natural disasters (e.g., floods, hail, hurricanes, earthquakes)
• Fire
• Falling objects (e.g., trees, debris)
• Animal collisions (e.g., hitting a deer)
• Civil disturbances (e.g., riots, protests)

Protect your financed car from the most unexpected events. Get our affordable full coverage auto insurance required by your lender. Contact our insurance agent today to secure same-day car insurance from L.A. Insurance.

Do You Need Full Coverage Insurance on a Used Financed Car?

Yes, most lenders require full coverage on a used financed car, just like they do for a new one. Even though the vehicle is pre-owned, it still serves as collateral for your auto loan. Without collision and comprehensive coverage, the lender risks losing their investment if the car is damaged or totaled.

Why Do You Need Full Coverage on a Financed Car?

The shortest answer to this question is they do it to protect their investment. Until you fully repay your auto loan, the vehicle belongs to the financial institution. If an accident, theft, or total loss occurs, they want to recover their money. Without collision and comprehensive coverage, the lender risks losing the car’s actual cash value.

In brief, here’s why lenders usually mandate full coverage auto insurance:

• To protect their investment
• Covers damages from accidents, even if you’re at fault
• Pays if your financed car is stolen, damaged by vandals, or natural disasters
• Prevents repossession if you fail to meet insurance requirements 

Can You Drop Full Coverage Insurance on a Financed Car?

No, you typically cannot drop full coverage insurance on a financed car until you fully repay your car loan. Lenders don’t allow this as it makes your vehicle financially vulnerable to various risks, including accidents and collisions. That’s why they mostly make full coverage auto insurance (liability, collision, and comprehensive) compulsory for every financed car owner.

Also, dropping comprehensive and collision insurance violates your contract with the lienholder. If you do so, the lender will take immediate action as soon as they become aware of it.

What Happens If You Take Off Full Coverage on a Financed Car?

If you remove full coverage insurance, your lender may impose force-placed insurance to cover the investment. This type of insurance is quite expensive compared to standard auto insurance and provides very little to no protection for you.

Here's what happens if take off full coverage on a financed car:

• Lender-placed insurance is added to your loan which increases your monthly payment.
• It does not cover your injuries, liability, or personal damages rather it just covers the lender’s financial interest.
• You could face repossession if you fail to pay for the forced-placed insurance.
• Your credit could suffer if unpaid insurance costs lead to loan default.

How Does My Lienholder Know If I Drop Full Coverage?

Your lender is listed on your insurance policy as a key party, called “additional insured”. So, if you remove full coverage insurance, your insurance company notifies them immediately. Besides, lenders monitor insurance requirements closely to make sure you’re not violating the contract.

Here are the ways lienholder detects dropped insurance coverage:

• Automatic notifications from your auto insurance provider about policy changes.
• Regular checks on your insurance policy to confirm collision and comprehensive coverage.
• Direct contact from your financial institution if a policy lapse occurs.
• Report from the state insurance database, which tracks active car insurance coverage.

When Should You Drop Full Coverage Insurance on a Financed Car?

You can drop full coverage insurance once your auto loan is fully repaid. At this point, the vehicle belongs to you, and lenders no longer require full coverage. But if you drop it too soon, it can be financially vulnerable in case of an accident, theft, or total loss.

Here is when you can consider dropping full coverage auto insurance:

• The cash value of your financed car is significantly lower than your deductible.
• You can afford to pay for damage by yourself.
• The cost of collision and comprehensive coverage exceeds 10% of your vehicle’s value.
• You have savings to cover property damage or unexpected auto repair costs.

Keep in mind that if you still owe on your loan, removing coverage could trigger force-placed insurance. So, speak with your lender first, if do consider downgrading or dropping insurance coverage.

Wrapping Up: Do You Need Full Coverage on a Financed Car?

Yes, the majority of lenders require you to carry full coverage car insurance on a financed car. This becomes your mandatory coverage until you repay the car loan. Lenders usually make this compulsory as they want to secure their investment. By protecting the cash value of your car in case of unforeseen events, they simply stay on the safer side. However, if your car is new and expensive, they may also require gap insurance as well.

If you do not carry or drop full coverage insurance too soon, it can result in costly lender-placed insurance or even repossession. Once your auto loan is cleared, you’re fully free to decide whether to keep full coverage or switch to liability only. We advise assessing your financial risks, repair costs, and insurance requirements before making any decision.

If you need auto insurance coverage for a financed vehicle, contact our affordable insurance agency specializes in financed car insurance. Our agents are just a call away. Give us a dial at (800) 893-9393.

Frequently Asked Questions (FAQs)

How long do I need full coverage on a financed car?

Ans: You need full coverage insurance for as long as your auto loan remains active. Until you repay the full payment, you’ll need to carry both comprehensive and collision insurance coverage. For example, if you finance a car with a loan term of 48 months, your lender will hold the title for that entire period. During those 48 months, you must maintain full coverage.

How much does insurance cost for a financed vehicle?

Ans: The cost of auto insurance for a financed car varies based on your state, vehicle type, driving history, and coverage levels. On average full coverage car insurance always costs more than liability only, but rates can also vary based on factors like deductible, credit score, and insurer.

What insurance coverage is required for a financed car?

Ans: As mentioned before, most lenders need you to carry full coverage insurance which includes liability, comprehensive, and collision insurance. However, in certain circumstances, they may also require gap insurance or uninsured motorist coverage to cover damages caused by drivers without insurance.

Do you need full coverage when financing a ten-year-old car?

Ans: Yes, lenders might require full coverage on any financed car, regardless of age. However, if the car’s cash value is low, you may evaluate whether full coverage auto insurance is worth the cost.

What happens if you total a financed car without full coverage?

Ans: If you total a financed car without full coverage insurance, you’re liable for paying the remaining loan balance. The lender may still require payment, even if the vehicle is undrivable. If you have an expensive, high-end, luxury financed car, we recommend insuring it with a gap insurance policy.

Do I need comprehensive insurance on financed car?

Ans: Yes, most lenders want to maintain comprehensive car insurance coverage as part of full coverage auto insurance. It covers theft, vandalism, weather damage, and other non-collision risks.

Do I need gap insurance on a financed car?

Ans: It depends on your lender. Gap insurance isn’t always mandated by lenders. If your financed car is total, gap insurance pays the difference between the loan balance and the vehicle’s actual value.