Does Financing a Car Affect Your Car Insurance?

Woman shaking hands with a car salesman inside a dealership after financing a new car
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Brian Teutsch / Flickr / CC BY 2.0

 

A common question many car owners have is whether financing a car affects their car insurance rates. The answer varies depending on exactly what you mean by "effects.

You will definitely have to fill out a bit more paperwork if you finance your car through a bank or other traditional financial institution than if you pay for the vehicle in cash. Lenders will want to be listed as a loss payee and possibly as additional insured on the car they have financed the purchase of. But thankfully, it does not cost you any more money to add a loss payee or additional insured to your car insurance.

Example: John purchased a $10,000 car with cash. He placed full coverage insurance on the vehicle to protect himself against a loss. A few months later, he was falling behind on bills and decided to go and get an auto loan on his car. He called his insurance agent and requested that his lender be listed as a loss payee. This was the only step required to make the change. His car insurance rates did not change at all.

Lenders Require Full Coverage

If you purchase a vehicle with your own money, you can elect to only purchase the mandatory minimum coverage for your state – but you’ll have no such option if you finance your vehicle. The main difference between having a loan on a vehicle versus not when it comes to car insurance is that lenders require both comprehensive coverage and collision coverage on top of the state minimum requirements. Being required to carry comprehensive and collision with your lender will most definitely raise your car insurance rates when compared with a liability-only policy.

Example: John purchased a $10,000 car with cash and didn't want to pay for full coverage insurance because he felt his risk of damage was very low. Later on, he was falling behind on his bills and decided to get a loan on his car. The lender required both comprehensive and collision coverage. His car insurance rate went up $45 per month ($540 annually) with the additional coverage requirement.

Can I Reduce My Coverage in the Winter Months?

You might think that if your car is not in use year-round, you’re off the hook for this additional requirement, but that is not typically the case. Most financed cars are required to carry full coverage all year round until the loan is paid off per the lender. Some lenders will allow you to put vehicles in storage when it is not in use but documentation from your insurance carrier will probably be required along with your signature verifying you will not drive the vehicle. The lender will most likely have a specific form you will take to your insurance agent for them to fill out.

Storage of a vehicle can be a big cost saving and it is worth it to ask your lender if it is a possibility.

Example: John financed a new convertible to ride around in for the summer months. He wants to keep it nice so he has an alternate old pickup he drives in the winter. He asks his lender if he can reduce his insurance coverage in the winter months to comprehensive only. The lender agrees and has John fill a form out and take it to his insurance agent for final completion. John's insurance rate is reduced all winter long because of the change in coverage. He will need to contact his insurance agent in the spring to increase coverage back to full coverage.

How Does a Lender Know What Coverage You Have On Car Insurance?

Financing a vehicle comes with a little extra paperwork. The lender will want to be added to your car insurance policy as a loss payee. Insurance carriers update loss payees through the mail of any changes to the policy regarding the vehicle they are listed on. These changes include late payments, coverage changes, and policy cancellation. If you make any changes to your car insurance policy, your auto loan provider will be the first to know.

Example: John financed a new car through his credit union and listed them as a loss payee on his car insurance. A few months later he gets behind on his car insurance and pays past his due date. Luckily, he is still in his grace period when he submits his payment. The credit union received a notice of the payment being late. The lender calls the insurance company to find out if the payment has been made. Confirmation of the payment is verified but had the payment not been submitted it could have led to the lender placing a third party car insurance policy on his vehicle.

Buying a New or Newer Car

Whether you are buying a new car or upgrading to a newer car, your car insurance rates are likely to change. Often rates go up because you are insuring a more expensive vehicle. Lots of factors affect the cost of insurance. Everything from how new the vehicle is to its safety rating can impact your rates. Always check with your insurance agent to get a quote on insurance before making a car purchase. Insurance should be figured into your budget before buying a car.

Example: John wants to buy a new car, and knows that he can afford to pay about $500 per month including car insurance. He has an appraisal and learns that his old car has a trade-in value of around $4,000. John knows he wants a 60-month loan so that he can keep both his interest payments and his monthly payments in check. He plugs the trade-in value of his vehicle and his desired monthly payment into a calculator and estimates that he can afford a car that costs around $32,000. However, this doesn’t include car insurance.

After researching a few models, John calls his car insurance agent and learns that his car insurance premium will cost him $80 a month. Spread over the life of the car loan, this will be about $4,800, meaning a more reasonable sticker price will be somewhere around $27,000.

Now You Know How Financing Impacts Insurance

Financing changes your insurance requirements. You have fewer choices because the lender requires coverage to protect its investment.

  • Financing a vehicle can impact your car insurance.
  • Listing a loss payee does not affect your insurance rate.
  • Lenders do require physical damage coverage which can increase your insurance costs if you were not already planning on the coverage.