Can I Have Liability on a Financed Car?
Understand your multifaceted responsibilities and potential risks when driving a car you're still paying for.
When a vehicle is financed, the borrower assumes several layers of responsibility. Understanding these obligations is important for managing the financial and legal aspects of car ownership. These responsibilities protect both the borrower and the lender throughout the loan term, involving contractual duties and personal accountability.
Understanding Financial Liability
The primary financial obligation for a financed car is loan repayment. As the borrower, you are legally responsible for repaying the principal and accrued interest, as stipulated in the loan agreement. Loan terms outline the total amount, interest rate, fixed monthly payment, and duration, often spanning 60 to 72 months.
Beyond regular monthly payments, other financial liabilities can arise from the loan contract. These include late fees if payments are not made on time, which can be a percentage of the overdue amount or a flat fee. Some loan agreements might also include prepayment penalties, a fee charged for paying off the loan early, though these are less common with modern auto loans.
Insurance Requirements for Financed Vehicles
Financed vehicles come with specific insurance obligations. Lenders require borrowers to maintain certain types of coverage beyond state-mandated minimum liability insurance. This usually includes collision and comprehensive coverage, often called “full coverage.” These requirements are part of the loan agreement, designed to protect the lender’s financial interest in the vehicle, which serves as collateral.
Collision insurance covers damage to your vehicle from an accident, regardless of fault. Comprehensive coverage protects against non-collision events such as theft, vandalism, fire, natural disasters, or damage from hitting an animal. State laws also mandate liability insurance, which covers bodily injury and property damage you cause to others in an accident.
Personal Legal Responsibility
Separate from financial obligations and insurance coverage, individual drivers retain personal legal responsibility for their actions involving the financed vehicle. Even with a comprehensive insurance policy, drivers can incur personal legal liability for accidents or damages caused by their negligence. If you are at fault, you could face civil lawsuits for bodily injury or property damage sustained by others.
Should costs exceed your insurance limits, your personal assets could be at risk. For example, if a judgment is higher than your policy’s payout, you would be personally responsible for the difference. This personal liability underscores that insurance acts as a protective layer but does not eliminate the driver’s fundamental legal accountability.
Consequences of Failing to Meet Obligations
Failing to meet financial and insurance obligations for a financed vehicle can lead to severe consequences. If loan payments are not made, the loan can default, leading to vehicle repossession by the lender. Repossession negatively impacts your credit score, and this derogatory mark can remain on your credit report for up to seven years, making it difficult to obtain future credit. If the sale of the repossessed vehicle does not cover the outstanding loan balance, the lender may pursue a deficiency judgment, requiring you to pay the remaining amount.
Similarly, failure to maintain the required insurance coverage can have serious repercussions. Lenders may force-place expensive insurance on your behalf, which protects only their interest in the vehicle and not yours, with the cost added to your loan payments. Driving without legally required insurance can also result in significant legal penalties, including fines, license suspension, and vehicle impoundment. In an accident while uninsured, you would be personally responsible for all damages and medical expenses, potentially leading to substantial out-of-pocket costs.