Can I Just Get Liability Insurance on a Financed Car?
Understand the essential insurance requirements for a financed car. Learn why liability-only isn't typically an option and what lenders expect.
When financing a vehicle, a common question arises regarding the minimum insurance coverage required. While liability insurance is a fundamental component of vehicle ownership, securing a car loan often involves additional, specific insurance mandates. These requirements protect the financial interests of the lending institution that holds a claim on the vehicle.
Understanding Required Coverage
Liability insurance is a standard requirement in nearly every state, regardless of whether a vehicle is financed or owned outright. This coverage helps pay for damages to other vehicles or property and bodily injuries if the policyholder is at fault in an accident. It protects the driver financially from claims made by other parties.
Lenders typically require more extensive coverage, commonly referred to as “full coverage,” for financed vehicles. This usually includes both comprehensive and collision insurance. Collision coverage pays for damage to the financed vehicle from an impact with another vehicle or object, irrespective of who is at fault. Comprehensive coverage addresses damage from non-collision events such as theft, vandalism, fire, natural disasters, or impacts with animals. These coverages protect the lender’s financial interest in the vehicle, ensuring the asset can be repaired or replaced if damaged or stolen.
Your Loan Agreement Terms
The specific insurance requirements for a financed vehicle are legally binding obligations detailed within the car loan agreement. This document outlines the mandates that borrowers must adhere to throughout the loan term. It is a contractual stipulation that borrowers agree to upon signing.
Borrowers should carefully review their loan agreement to understand the exact types of coverage required, including any specified deductible limits. Some agreements may specify a maximum deductible, such as $500, to ensure adequate protection for the lender. The agreement typically states the duration for which this coverage must be maintained, usually until the loan is fully repaid.
Actions for Non-Compliance
Should a borrower fail to maintain the insurance coverage specified in the loan agreement, the lender can take specific actions to protect its financial interest. One common measure is for the lender to purchase “force-placed insurance,” also known as collateral protection insurance (CPI). This type of policy is typically more expensive than standard insurance, potentially costing four to ten times more, and the premiums are added directly to the borrower’s loan balance, increasing monthly payments.
Force-placed insurance generally only protects the lender’s interest in the vehicle, covering physical damage or loss to the collateral. It often provides limited or no coverage for the borrower, meaning it may not include liability or personal injury protection. Failure to maintain the required insurance can constitute a default on the loan agreement, which may lead to more severe consequences.
If the loan is in default, the lender has the right to repossess the vehicle, typically after 30 to 90 days of missed payments or non-compliance. Repossession can negatively impact the borrower’s credit score for several years and may result in the borrower still owing a “deficiency balance” if the sale of the repossessed vehicle does not cover the remaining loan amount and associated fees.