Does Financing a Car Affect Your Car Insurance?
Here's the insurance you need if you finance your car
Financing a car has certain effects on your car insurance policy, but not all of them will cost you money.
Financing and Car Insurance
Financing changes your insurance requirements. You have fewer choices because the lender requires coverage to protect its investment:
- Lenders do require physical damage coverage ,which can increase your insurance costs if you were not already planning on the coverage.
- Listing a loss payee does not affect your insurance rate.
- Lenders may require year-round coverage, even if you store a vehicle.
Let's explore these concepts in greater detail:
Lenders Require Full Coverage
The main expense when insuring a financed car is that lenders require both comprehensive coverage and collision coverage on top of the state minimum requirements for auto insurance.
Being required to carry comprehensive and collision with your lender will raise your car insurance rates when compared with a liability-only policy.
When you purchase a vehicle with your own money, you can make the cheaper choice to purchase only your state's mandatory minimum coverage.
Example: Joan purchased a $20,000 car with $10,000 cash and a $10,000 loan, but didn't want to pay for full coverage insurance because she felt the risk of damage was very low. The lender required both comprehensive and collision coverage. The car insurance rate doubled with the additional coverage requirement because the car was relatively new.
Lenders Become a Payee
Lenders will ask to be the payee in case of loss and may also ask to be listed as additional insured for the car they have financed. It does not cost you any more money to add a lender as a loss payee or additional insured.
Example: Jean purchased a $20,000 car with $10,000 cash and a $10,000 loan. She placed full coverage insurance on the vehicle to protect against a loss and listed the lender as a loss payee. The car insurance rates were identical.
Reduced Coverage During Non-Use Months
You might think that if your car is not in use year-round, you’re off the hook for insurance coverage, but that is not always the case.
Most financed cars are required to carry full coverage all year round until the loan is paid off. The lender decides.
Some lenders will allow you to put vehicles in storage when 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 for your insurance agent 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 wanted to keep it in good condition, so he drove an old pickup truck in winter. He asked his lender if he can reduce his insurance coverage in the winter months to comprehensive only. The lender agreed and had John complete a form and take it to his insurance agent for final completion. John's insurance rate was reduced all winter long because of the change in coverage. He will need to contact his insurance agent in the spring to return to full coverage.
Lenders Can Change Your Insurance If You Lapse
Insurance carriers update loss payees about any changes to the policy regarding the vehicle they are listed on. These changes include late payments, coverage changes, and policy cancellation. So if you make any changes to your car insurance policy, your auto loan provider, as a payee, will be the first to know.
Example: Joe financed a new car through his credit union and listed them as a loss payee on his car insurance. A few months later he got behind on his car insurance and paid past his due date. Luckily, he was still in his grace period when he submitted his payment. The credit union received a notice of the payment being late. The lender called the insurance company to find out if the payment was made. Confirmation of the payment was verified, but if the payment had not been submitted, it could have led to the lender placing a third-party car insurance policy on the vehicle.
When Financing a New or Late-Model 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 a vehicle's age to its safety rating can impact your rates. Always check with your insurance agent to get a quote on the insurance before making a car purchase. Insurance should be figured into your budget before buying a car.
Example: Jill wanted to buy a new car, and knew she could afford to pay about $500 per month, including car insurance. An appraisal revealed her old car had a trade-in value of around $4,000. Jill wanted a 60-month loan so she could keep both interest and monthly payments in check. She plugged the trade-in value and desired monthly payment into a calculator and estimated that she could afford a car that cost around $32,000. However, this did not include car insurance. After researching a few models, Jill checked with her car insurance provider and discovered the new car insurance premium would cost $80 a month. Spread over the life of the car loan, that would be about $4,800, meaning a more reasonable sticker price was somewhere around $27,000 to meet her affordable total price goal of $32,000.