What Insurance Is Required for a Financed Car?
Navigate the layers of insurance needed for a financed car. Secure your loan, meet obligations, and protect your financial future.
When a car is financed, ownership is not fully transferred to the buyer until the loan is completely repaid. This means a financial institution holds a vested interest in the vehicle as collateral. Consequently, specific insurance obligations extend beyond what is typically required for a car owned outright.
State Mandated Insurance
State laws require a minimum level of auto insurance for any vehicle operated on public roads, irrespective of whether it is financed. The primary component of this mandatory coverage is liability insurance, which protects other parties if you are at fault in an accident.
Liability insurance consists of two main parts: bodily injury liability and property damage liability. Bodily injury liability helps cover medical expenses, lost wages, and legal fees for others injured in an accident you cause. Property damage liability pays for damage you inflict on another person’s vehicle or property, such as a fence or building. These state-mandated minimums vary by jurisdiction and focus on protecting other individuals and their property.
Lender Required Coverages
When you finance a vehicle, lenders mandate additional insurance to protect their financial stake in the asset. Since the lender technically owns the car until the loan is fully satisfied, they require protection against physical damage or loss. These additional coverages include collision and comprehensive insurance.
Collision insurance helps pay to repair or replace your vehicle if it is damaged in an accident involving another vehicle or object, such as a tree or guardrail. This coverage applies regardless of who is at fault. Comprehensive insurance covers damage to your vehicle from non-collision events. This includes incidents like theft, vandalism, fire, natural disasters such as floods or hail, and contact with animals.
Lenders require both collision and comprehensive coverage to ensure the physical asset securing the loan is protected against a broad range of potential damages or total loss. Without these coverages, if the vehicle were significantly damaged or totaled, the lender would risk losing their investment. Both collision and comprehensive coverages involve a deductible, the amount you pay out of pocket before your insurance begins to pay for damages. Deductible amounts can range from $250 to $1,000, with higher deductibles resulting in lower premiums.
Additional Recommended Coverages
Beyond state and lender requirements, other insurance coverages are recommended for financed vehicles due to financial implications. Guaranteed Asset Protection (GAP) insurance is valuable. This coverage helps pay off your auto loan if your car is totaled or stolen and you owe more than the vehicle’s depreciated value. Cars depreciate quickly, meaning the actual cash value may be less than the outstanding loan balance, creating “negative equity.” GAP insurance bridges this financial gap, preventing you from owing money on a car you no longer possess.
Uninsured/underinsured motorist (UM/UIM) coverage offers protection if you are involved in an accident with a driver who has no insurance or insufficient insurance to cover your damages. This coverage helps with medical bills, lost wages, and pain and suffering, and in some states, property damage to your vehicle. Many states either require or strongly recommend UM/UIM coverage.
Medical Payments (MedPay) or Personal Injury Protection (PIP) is another beneficial coverage, especially in no-fault states. These coverages help pay for medical expenses for you and your passengers resulting from an accident, regardless of who was at fault. PIP can also cover lost wages and other expenses, providing broader protection than MedPay. These additional coverages provide significant financial protection to the borrower.