Do I need full coverage insurance to finance a car?

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Daniel Walker
Licensed Insurance Agent

UPDATED: Apr 3, 2020

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Things to Remember...

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.

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

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 with our free tool to make sure you get the best rate for the right price!

Why Financing Your Car Could Cost You More Than You Expect


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.

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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What are the common lender insurance requirements?

You should ask about lending 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 required:

  • 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

Can you select high deductibles to keep the costs down?


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.

What is the penalty for failing to buy full coverage insurance?

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.

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 by entering your zip code into our FREE online quoting system.

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