Does Financing a Car Affect Your Car Insurance?

New Car Financing
Getty Images/Joe Raedle

A common question many car owners have is whether financing a car affects your car insurance rates. The answer varies depending on exactly what you mean by "affects". Lenders want to be listed as a loss payee and or additional insured on the car which they have lent money. It does not cost any more money for car insurance to add a loss payee or additional insured.

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 a loan on his car. He called his insurance agent and requested his lender to be listed as a loss payee. His car insurance rates did not change.

Lenders Require Full Coverage

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 by 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 a month with the additional coverage requirement.

Can I Reduce My Coverage in the Winter Months?

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 on a vehicle can be a big cost savings 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 onto 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.

It includes late payments, coverage changes, and policy cancellation.

Example: John financed a new car through his credit union and listed them as 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 paid. 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 including 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.

Recap

  • 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.