Do I need full coverage insurance to finance a car?

You need full coverage insurance to finance a car as lenders require you to carry it for the duration of the loan. Full coverage auto insurance averages $79.58/mo. in the U.S. and is needed for all financed vehicles, both used and new.

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Mathew B. Sims is Editor-in-Chief and has authored, edited, and contributed to several books. He has been working in the insurance industry ensuring content is accurate for consumers who are searching for the best policies and rates...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance...

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Reviewed byDaniel Walker
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UPDATED: Jul 8, 2020

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Things to Remember...

  • Most states only require drivers to carry third-party liability insurance
  • While full coverage insurance is optional in the eyes of the state, it is required by lenders and lessors when you are financing or leasing your car
  • Lenders and lessors have contracts that require borrowers to purchase and maintain full coverage on the vehicle to protect the property while the company owns it
  • The lender will ask that you name the company as a loss payee on the policy so they have to sign claims checks before they can be cashed by the borrower
  • Many companies accept deductibles that are $500 and below to ensure that the insured can cover it when a claim is filed

Can you get a car on finance with insurance included? Learning what insurance you need to finance a car is important. The minimum insurance coverage for financed cars is full coverage auto insurance. Lenders and lessors require you to maintain full coverage while financing or leasing a car.

Average full coverage auto insurance costs $79.58/month in the US. When you buy a car, it’s important to budget for all of the costs that are associated with car ownership.

You may know the importance of comparing interest rates and negotiating the sales price of a car. Read on to learn how to find the cheapest insurance for a finance car.

But factoring in the ongoing costs of car ownership is just as important. One cost that won’t go away is your insurance premiums.

Do you need full coverage insurance to finance a car? Buying auto insurance is a must when you buy a car. If you finance or lease your vehicle, you need more than just a basic insurance policy.

Instead of a basic policy, you need to budget for the price of a full coverage insurance policy. Here’s what you need to know about insuring a financed car.

Start comparison shopping for full coverage on your financed vehicle with our free tool below by entering your ZIP code. Make sure you get the best rate for the right price.

What auto insurance is required for a car loan?

Do you need full coverage on a new car? Your lender will probably make you buy coverage that includes liability, collision, and comprehensive.

  • Many financial institutions require full coverage auto insurance before financing a car
  • You will probably have to purchase an auto insurance policy that includes liability, collision and comprehensive
  • To find an affordable full coverage insurance policy for your financed vehicle, you should use a comparison tool

When you finance a new car, you will need full coverage auto insurance.

The table below shows the average yearly rates for full coverage across the United States.

Annual Average Auto Insurance Rates in the U.S.
Type of Auto Insurance CoverageAnnual Auto Insurance Rates
liability$516.39
comprehensive$138.87
collision$299.73
full coverage$954.99
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When insurance agents and other drivers talk about full coverage auto insurance, they are referring to a policy that includes these types of auto insurance coverage:

  • Liability coverage
  • Comprehensive coverage
  • Collision coverage

This type of full-featured policy protects you whether you are at fault or someone else is at fault, in the case of an accident.

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What are the common lender auto insurance requirements?

If you finance a car what insurance do you need? Do you need full coverage if you finance a car?

You should ask about lending requirements and auto loan insurance requirements before you enter into any finance contract. When you finance a car, you don’t hold the title until you pay the loan off.

The lender has a lien on the title until the loan balance is zero. While there is a lien on the title, the insurer is free to dictate how much insurance you must purchase.

Most conventional lenders require borrowers to purchase full coverage insurance on the vehicle while the lender is a co-owner of the car.

Full coverage insurance consists of physical damage coverage and the state’s minimum coverage requirements. Lessors may even require their borrowers to carry higher limits of liability for added protection.

Here’s what’s typically required for your car loan insurance requirements:

  • Bodily Injury – Pays for third-party medical expenses when you are at fault in an accident that results in injury
  • Property Damage – Pays for third-party property repair when you are at fault in an accident that results in damage
  • Comprehensive – Pays for damage to the covered auto when it’s damaged due to a fire, theft, vandalism, explosion, or flood
  • Collision – Pays for damage to the covered auto when you collide with another object

Keep in mind this is the minimum coverage for financed vehicles and requirements my differ from one lender to another.

What is the penalty for not carrying full coverage auto insurance?

Do i need insurance to finance a car? If you want to try and cheat the system, you should think again. Lenders must be listed as the loss payee on the policy.

When there’s a loss payee clause, the company must notify the lender when coverage expires, cancels, or renews. The lender will also be on the check when a claims payment is made.

If you fail to keep your insurance active, the lender can force-place insurance costs into the loan. New York State Department of Financial Services notes that this is a lot more expensive than a regular policy. This may even be applied to your loan so that you’ll end up paying it anyway.

Forced-placed insurance doesn’t protect you in any way. If you want protection, you need to buy your own standard, full-coverage car insurance. Since full coverage averages $841 per year in the United States, it’s important that you shop around.

Make sure you do a thorough rate comparison of your car loan insurance costs by entering your zip code into our FREE online quoting system.

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State Requirements for Auto Insurance

When a state has a mandatory auto insurance law, it’s the legal owner’s responsibility to comply with the law.

If you own the car outright, there’s no question who the legal owner is. When you’re financing a car, you don’t technically own the car until the loan balance reaches $0.

Even though you’re not the title-holder or owner of the car, it’s your duty to register the vehicle that you’re financing in your name.

In fact, the dealer will finance the car for you showing you as the registered owner. Since you’re the registered owner of the car, it’s your job to buy a minimum amount of mandatory coverage on your car so that you satisfy the law and avoid penalties.

You need to comply with state law to avoid being cited for a misdemeanor.

While coverage is required, not all coverage is mandatory. Each state has different coverage requirements based on the type of system that the state operates under.

Most of the requirements are means to pay for others damages and not yours. Here’s what you’ll need to buy at the minimum:

  • Bodily Injury
  • Property Damage
  • Personal Injury Protection (only required in no-fault states)

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Your Lender Will Require Full Coverage Auto Insurance

The state is concerned with the damage that you cause to others. If the state didn’t pass compulsory auto insurance laws, there would be no way to ensure that people could pay for their repairs and their medical treatment after they were a victim in a car accident.

While liability insurance is necessary, you need more than just that if you have an auto loan.

One of the terms that you agree to when you take out your auto loan is that you’ll buy full coverage on the car. Full coverage consists of comprehensive and collision coverage and it protects the property that’s listed on the policy if it’s damaged.

The Reason for Full Coverage Auto Insurance

What insurance do you need to finance a car? If you have a car loan, full coverage insurance is likely required.

Finance companies want to protect their investment.

When you take out a loan for the purchase of a vehicle, the financial institution has a vested interest in your vehicle until you pay off your loan.

If you miss a payment or default on the loan, they have the option of repossessing the car and selling it in order to satisfy the terms of your loan.

If the vehicle is damaged at the time of the repossession, the finance company will incur the costs. Instead of risking this loss, the finance company wants to insure you can cover this cost in the case of an accident.

We’ll discuss the three types of financed car insurance requirements these companies require:

Liability Auto Insurance

Can you have liability insurance on a financed car? In order to satisfy the requirements of your state’s insurance laws, you will need to purchase a policy that includes liability insurance.

Even vehicles that are paid off must have a minimum amount of liability coverage.

This policy pays for the damages caused by you if you hit another vehicle or damage someone else’s property with your vehicle. Liability insurance does not come with a deductible.

Collision Auto Insurance

Collision insurance is required by financial institutions because it pays for the damage to your vehicle if you are the one that caused the accident.

If you hit another vehicle or damage your car by hitting an object, your collision policy pays for the damage to your car minus the amount of your deductible.

Comprehensive Auto Insurance

The comprehensive portion of your insurance policy covers damage to your vehicle that did not occur while you were driving it.

Common comprehensive claims include:

  • Fire
  • Theft
  • Vandalism
  • Certain types of weather-related damage

Comprehensive insurance may or may not have an associated deductible.

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GAP Auto Insurance

To protect yourself, you may want to consider purchasing a GAP insurance policy along with your full coverage insurance policy.

GAP insurance protects you against financial loss if you get into a car accident that results in your car being declared a total loss.

This video from Allstate explains more about GAP coverage.

Is GAP insurance worth it for a new car? When you drive off the lot, your vehicle automatically loses some value. GAP coverage helps with covering that depreciation if you need to make a claim.

When a car is declared a total loss, the insurance company offers you the value of your car instead of replacing your vehicle.

If this amount is less than what you owe on your car loan, you will have to pay off the remainder of that money out of pocket. GAP insurance ensures that you are not paying thousands once your vehicle is totaled.

Financing A Car Can Cost More Than Expected

When you get a good interest rate, financing your car purchase can make financial sense. After all, putting up $20,000 or more to buy a vehicle outright isn’t a feasible option for every consumer.

While financing is a good alternative, it might cost you more than you calculated in the finance office of the dealership.

One of the main reasons financing a car can cost you more than what’s laid out in your lending agreement is because of the lender’s insurance requirements. State requirements and lender requirements are very different.

The Federal Trade Commission notes that you should take a few steps before buying like checking your credit score ahead of time.

When you get a car on finance, is insurance included? You must buy a separate policy, and your lender will usually require that you have full coverage for the duration of the loan. 

You must always have what’s required by the state, but you must have both state-mandated coverage limits and what’s required by the lender when you’re financing.

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Can you select a high deductible for auto insurance?

Yes, you can find cheap auto insurance for a financed car. One way that you can save money on your auto insurance is by raising your deductibles. Unfortunately, this is a tactic that isn’t always useful when you’re financing.

Most finance companies limit how high your deductibles for comprehensive and collision can be. The purpose of the limit is to ensure that the property is repaired after a loss.

Most guidelines state that they can’t be higher than $500 without company approval. Approval for higher deductibles might be given on luxury cars or high loans where the borrower can afford to pay $1,000 or $2,000 to cover damages.

If your deductible is too high, you will be penalized as if you don’t have insurance at all.

Can you choose any deductible for your auto insurance?

You have to have comprehensive and collision at all times but you also have to comply with the deductible rules.

The deductible is the amount that has to be subtracted from your claim when it’s paid. Since carrying a high deductible can be a risk to the lender, it’s common for the loan contract to say that your deductible must be $500 or lower.

When you’re buying a car at a dealership, you have to budget for the monthly car payment and also insurance expenses. Don’t overlook how much insurance premiums can cost you over the span of a year.

How to Find an Affordable Auto Insurance Policy

If you know you are going to finance a new car ahead of time, it is in your best interest to use a comparison tool to compare prices.

Different years, makes, and models of vehicles cost all affect your insurance rate. The insurance company assesses a risk factor to each class and year of vehicle.

When it comes to insuring a new car, the price of your auto insurance policy are all influenced by factors, such as the car’s:

  • Safety features
  • Safety record
  • Horsepower
  • Overall cost
  • Likelihood of being stolen

One of the ways you can mitigate that cost is by comparing quotes for the vehicles you are considering purchasing. Comparing quotes will help you determine if the car is affordable in the long run.

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When you finance a car, does it include auto insurance?

Most lenders require you to purchase full coverage for your car until you’ve paid off the loan.

  • Do you need full coverage on a financed car? If you finance a car, you have to comply with the terms of the finance contract to avoid raising the balance of your auto loan
  • When you’re borrowing from a lender to buy a car, you’re technically not the vehicle owner or titleholder until you’ve paid off your loan
  • When you pay the auto loan off, you will receive a clear title
  • Even though you don’t legally own the vehicle outright, it’s your duty as the registered owner of the car to maintain insurance on the vehicle
  • The lender and the dealer will not provide coverage for the car once you take possession of it
  • Not only does the borrower have to comply with auto insurance laws mandated by the state, they also have to comply with the rules set forth by the lender
  • Virtually all lenders require their borrowers to purchase full coverage that includes at least comprehensive and collision coverage.
  • Many lenders will also limit the deductible that you choose to $500 or lower to ensure that you can repair the car when it’s damaged

When you buy a car, there are two ways that you can qualify for a loan. These two options are referred to as direct lending and dealership financing.

As a borrower, it’s up to you to decide if advance credit terms offered directly through the bank offers more of an advantage than the convenience that you can enjoy in the dealership finance office.

While the process of obtaining each loan is different, most loans that you secure directly from your bank or credit union have the same requirements and terms as the loans that you can select from the dealer.

One of the terms that you have to comply with when you’re borrowing a great sum of money to buy a car involves insurance.

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Is auto insurance included in your finance contract?

When you’re approved for a loan, the creditor will issue a statement that shows how much you’ll pay each month, how much you’re financing, what the Annual Percentage Rate is, the finance charge, and the total cost of all of the payments.

All of the charges will be found in the loan contract. If you decide to add extras like a warranty or GAP insurance that’s sold in the finance office, the amount financed and total interest paid can change.

It’s important that you know that the contract won’t automatically provide you with insurance for the car. It’s your duty to buy auto insurance separately.

What is the difference between GAP insurance and full coverage auto insurance?

If you’ve financed a car and purchased GAP auto insurance with your contract, you might have assumed that you were paying for your insurance each time you paid your car note. While this is a fair assumption to make, GAP insurance isn’t the same thing as standard auto insurance.

You still need a standard auto insurance policy when you buy supplemental coverage.

GAP insurance stands for Guaranteed Auto Protection. It’s a supplemental form of coverage that’s available to help protect you from financial loss if you total a car that’s being financed or leased.

The purpose of GAP coverage is to pay after the standard auto insurance pays out the car’s total value after a damage loss. As its name implies, GAP insurance is supposed to fill in the gap that’s present when you owe more than a car is worth.

Frequently Asked Questions

We’ve added a few more FAQs below.

Do you need full coverage on a used financed car?

When financing a car what insurance do you need for a used vehicle? 

Regardless of whether the vehicle is used or new, most lenders will require full coverage to be on the vehicle for the duration of the loan.

Can I finance a car without full coverage auto insurance? 

It’s really rare to find a lender who will supply auto loans that don’t require full coverage. They see it as a way to protect their assets until you hold the title in your hand.

To find more affordable options, you can get online quotes from several companies at once. Use an online quote tool, enter your zip, and start comparing the premiums for various limits of liability coverage right this very minute.

Enter your zip code below to compare auto insurance rates for a financed car from multiple companies at once!

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