How to Get Insurance on a Financed Car
Last Updated on December 27, 2020
Financing a car can be a great option if you can’t afford to buy a vehicle outright. A car is a big investment, and many people just don’t have enough saved up to purchase the vehicle in one lump sum. When you finance a car, it can affect the amount and type of insurance you need. However, the extra cost of meeting your lender’s insurance requirements is typically offset by the benefits of having a low monthly car payment. Here’s what you need to know about insurance requirements for a financed car and how to find a great policy.
How to Finance a Car
Before you can think about insurance, you’ll need to know how to finance a car. The first thing to do is to check your credit score and see what kind of loan you can get. If your credit score is poor, you will likely need to pay a higher interest rate, and you may even be denied by some banks that have strict credit requirements. You should set a budget before you start looking at cars or loans. Your car’s monthly payment shouldn’t be so expensive that it would eat into your ability to pay your other bills.
Once you know your credit score and have confirmed that you can qualify for a reasonably priced loan, it’s time to start comparison shopping. You should always get quotes from several different lenders before committing to a loan, just to be sure that you’re getting the best possible interest rates. Car dealers will typically offer their own financing, but you can also get financing from a bank or an online lender.
When you find a loan, you will need to apply for pre-approval to finance your car. You should avoid applying for more than one loan unless it’s absolutely necessary because this could hurt your credit score. Once you have your pre-approval, you’ll need to take that to your car dealership in order to make the final purchase.
Insurance Requirements for a Financed Car
Lenders typically have strict insurance requirements that go beyond your state’s insurance laws. Lenders do this in order to protect themselves financially in case your car is involved in a crash. Although you will be the one driving the car, it is technically still their asset until you pay the entire car off. In fact, your lender can take out their own insurance policy on the car if yours lapses at any point.
In addition to your state’s liability laws, you will also need to purchase collision and comprehensive insurance. Insurance policies with liability, collision, and comprehensive coverage are often called “full coverage” policies. They provide much better financial protection for both you and the lender if you are involved in an accident.
Collision coverage pays for damage done to your vehicle in a collision. Comprehensive coverage pays for damage to your vehicle from non-collision events. It also provides coverage for things like weather-related damage or vandalism, which wouldn’t be covered under your basic liability plan. If your lender is particularly strict, they may also require you to have other forms of add-on coverage. This is particularly true if you’re financing a very valuable car.
Gap Coverage Requirements
Many insurers will also require gap coverage. Gap insurance will cover the difference between the actual cash value of your vehicle and how much you owe on the vehicle. Vehicles depreciate quickly, so oftentimes, you’ll owe more to your lender than your vehicle is actually worth. If you total your car, you will have to pay out of pocket for the remaining dollar amount. This is where gap insurance helps. It will cover the rest of the bill so you never have to dip into your own savings.
How Much Does Insurance Cost for Financed Vehicles?
It’s important to note that because of these extra insurance requirements that come with financing a car, your insurance will be more expensive than just getting liability coverage. A simple liability-only plan costs Americans an average of $588 annually. A full-coverage plan, which is what your lender would require, costs Americans an average of $1,494 annually.
You’ll need to factor this additional monthly expense into your budget. Having this extra coverage may seem like a hassle, but if you drive frequently, it can save you from a tough financial situation if you do end up in an accident.
Your lender will likely also require you to have car insurance year-round, regardless of how much you drive. Some people drive certain cars seasonally – for example, you might want a tough all-wheel-drive SUV for winter, or a convertible for the warm summer months. However, you’ll need to maintain your car insurance throughout the entire year if you are using it at all. If you are putting your car in storage, you may be able to talk to your lender about reducing your coverage while your car is put away.
Finally, you’ll need to make sure that your lender is listed as a payee on your car insurance policy. This means that they could receive a claim payout for the car if it is necessary. Adding multiple payees to your car insurance policy won’t raise your rates.
When you sign a loan, you should talk to your lender about their car insurance requirements and make sure you understand them fully. If you can, get a copy of the requirements in writing. This will make sure there isn’t any confusion later on if you do need to file an insurance claim.
What to Look for When Buying Car Insurance
Buying insurance for your financed car can be overwhelming, but it’s very important. You will feel much better knowing that you are protected financially if you get into a crash on the road. Staying in good graces with your lender is also extremely important.
Finding the right insurance company for you can be tricky, as there are so many options. The key is to compare rates from several different insurance companies. Your rates could vary quite a bit from company to company because each insurer has its own system for calculating the cost of insurance. Be sure to ask about any potential discounts they offer and let them know that you are shopping around. Check with both large national insurers and smaller regional ones – you might be surprised by who can offer you the best discount.
If you are really struggling to find a good car insurance provider, you can always ask your lender for recommendations. They may have preferred insurers that they have worked with before and feel most comfortable with.
Financing a car is a way to get the transportation you need without having to pay for the entire car upfront. Before you finance, it’s important to be aware of not only your monthly loan costs, but your insurance costs too. Lenders will often require you to pay more for extended insurance coverage beyond what your state requires. These additional costs will need to factor into your budget before you finance your new car.