Does a Repossession Affect Car Insurance?
Understand how car repossession impacts your current and future auto insurance coverage and why insurers consider financial history.
A car repossession occurs when a lender reclaims a vehicle because the borrower has failed to make payments as agreed upon in the loan contract. While lenders can sometimes repossess a vehicle after a single missed payment, it typically happens when payments are 90 days or more past due. This financial event can have wide-ranging implications, including impacts on an individual’s financial standing and future access to credit.
Impact on Your Current Car Insurance Policy
A car repossession primarily affects an individual’s financial standing and does not typically constitute a direct insurance claim or liability issue. Therefore, a repossession itself is unlikely to trigger an immediate cancellation or non-renewal of an existing car insurance policy. The insurance company’s primary concern remains the insured vehicle.
However, once a vehicle is repossessed, policyholders are generally responsible for maintaining insurance on the repossessed vehicle until the lender sells it. If coverage is not maintained, the lender may obtain “force-placed” or “lender-placed” insurance and pass the often higher costs onto the borrower. Canceling a policy without securing new coverage for a different vehicle might lead to a lapse in insurance history, potentially resulting in higher rates in the future.
Securing Future Car Insurance
Obtaining new car insurance after a repossession often presents challenges, as this financial event can significantly affect an individual’s credit report. Many insurers utilize credit reports to generate an “insurance score,” which helps them assess risk during the underwriting process. A repossession can cause a substantial drop in a credit score, potentially by 100 points or more, which signals increased financial risk to insurers.
A lower insurance score, influenced by the repossession, frequently leads to higher premiums for new policies. In some instances, it may also make it more difficult to find coverage from certain insurers, as some may view the individual as a higher risk. Different insurance companies weigh financial history and credit scores differently in their underwriting guidelines. Consequently, shopping around and comparing quotes from multiple insurance providers becomes important after a repossession to find the most favorable rates available.
How Insurers Assess Risk After Repossession
Insurers employ various data points to assess the risk associated with a policyholder, including credit history, payment reliability, and overall financial stability. While a repossession is a financial event and not directly related to driving risk or claims, it reflects negatively on an individual’s financial stability. This financial distress can signal to insurers a higher likelihood of future missed payments or policy lapses. Insurers often draw a correlation between financial responsibility and the probability of filing claims. The severity of the credit score drop, often influenced by late payments leading up to the repossession, directly impacts how insurers determine rates.