Buying a vehicle with a car loan involves more than choosing a vehicle and calculating the monthly financing payment. Auto insurance is another major cost that borrowers need to consider before signing a financing agreement.
When a vehicle is financed, the lender has a financial interest in the car. As a result, lenders generally require insurance coverage that protects the vehicle during the loan period.
Why Do Lenders Require Auto Insurance?
A financed vehicle is generally collateral for the loan. If the vehicle is damaged or destroyed, the lender could face a financial loss.
For this reason, lenders generally require borrowers to maintain insurance on financed vehicles.
Insurance Is Part of the Real Car Budget
A buyer might calculate that a $500 monthly loan payment fits their budget. But the real monthly transportation cost could be much higher after adding insurance, fuel, maintenance, repairs, registration, and other expenses.
Before buying, request insurance quotes for the exact vehicle you are considering.
Compare Insurance Quotes
Insurance prices can vary depending on the driver, vehicle, location, coverage selections, deductibles, and other factors.
When comparing policies, examine liability coverage, collision coverage, comprehensive coverage, deductibles, coverage limits, optional protections, exclusions, and premium.
A low premium may come with different coverage or higher out-of-pocket costs.
What Is Comprehensive and Collision Coverage?
Collision coverage generally addresses certain damage resulting from a collision, subject to the policy terms.
Comprehensive coverage generally addresses certain non-collision losses, such as theft or damage from covered events.
For a financed vehicle, the lender may require certain physical-damage coverage.
What Is GAP Insurance?
GAP insurance is a type of optional protection that may cover some or all of the difference between a vehicle’s value and the remaining loan balance after a covered total loss, depending on the contract.
This can matter because vehicles can depreciate quickly, particularly during the early period of ownership.
What Is Credit Insurance?
Some borrowers may also be offered credit insurance.
Credit insurance can be designed to make certain loan payments if qualifying events occur, such as death, disability, or involuntary unemployment, depending on the product.
These products are generally optional, and their eligibility requirements and benefits vary.
What Happens If Insurance Lapses?
If required insurance coverage ends, the lender may obtain force-placed insurance.
Force-placed insurance can protect the lender and vehicle but may not provide the same protection for the borrower.
Keeping your insurance active and providing proof when requested can help prevent problems.
Don’t Add Insurance Products Without Reading the Contract
Dealers and lenders may offer optional products during the financing process.
Before accepting anything, ask what the product covers, how much it costs, whether the cost is being added to your loan, whether you can cancel it, and what happens if you sell or refinance the vehicle.
Final Thoughts
Auto insurance and car financing are closely connected because the lender wants the financed vehicle protected. However, insurance is also essential for protecting the driver and meeting legal and contractual requirements.
When buying a car, calculate the complete monthly cost rather than focusing only on the loan payment. Compare insurance quotes, understand coverage requirements, and read optional product contracts carefully.
This article is for educational purposes and is not individualized insurance or financial advice.
