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Do I need full coverage on a financed car?

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You’ve saved for the down payment and done all your research, and now it’s time to sit down and purchase your new car. If you—like 85.5% of all new vehicle purchasers in 20201—have decided to finance your vehicle, you know that making monthly payments is important. 

But that’s not the only consideration when purchasing a new vehicle. For vehicles that are purchased with a loan or are leased, the minimum legal requirement for liability insurance coverage isn’t enough. Your lender often requires even more auto insurance to protect your (and their) investment. This means paying for full auto insurance coverage for your new vehicle.

What is full coverage auto insurance?

Full coverage auto insurance for financed vehicles means that in addition to the regular minimum legally required auto insurance each driver is required to buy, you have purchased other insurance. Most lenders require you to buy additional auto insurance coverage for your financed or leased vehicle: collision coverage and comprehensive coverage. Unlike liability insurance coverage—which covers the cost of another person’s medical bills or damage you cause to another person’s vehicle or property—these coverage types exist to provide payment for repairs or replacement for your vehicle.

Collision coverage and comprehensive coverage aren’t the same thing: 

  • Collision coverage pays for repairs or damage to your vehicle in the event of an accident involving another vehicle. 
  • Comprehensive coverage pays for loss to your vehicle incurred due to an accident involving animals or damage from wind, hail, fallen trees, fire or theft.

How much does full coverage auto insurance cost?

Insurance rates for full coverage auto insurance vary due to several factors, including the specific vehicle insured, driving history, ZIP code, marital status and more. It’s hard to nail down a specific price, but from 2014-2018, average expenditures in the United States were around $1,056.55 a year for full coverage2. You can lower the cost of your car insurance by driving safely, looking at a higher deductible and parking your brand new vehicle in a garage.

Gap insurance fills coverage gaps left by full coverage.

In addition to full coverage, your auto lender may require you to purchase gap insurance. Gap insurance coverage is a separate type of insurance coverage that bridges the difference between what your vehicle is worth and what you currently owe on it.

On average, cars will depreciate (lose value) by more than 10% a month after you drive it off the lot, and may even lose 20% of its value after that first year. In the event of an accident, you may find that your insurance company’s full coverage policy will only cover its current value—not your purchase price. Most lenders require gap insurance to cover the remaining amount.

How do I buy gap insurance?

You can buy gap insurance directly from your auto lender, but it’s not recommended. Your gap insurance premiums will be rolled into the total financed cost of your vehicle. This makes them subject to interest. 

Instead, reach out to your current auto insurance company to find out if they offer gap insurance. Many insurers charge hundreds of dollars less for gap coverage than what your lender does. If your current insurance company does not offer the option for gap insurance, it may be worth shopping for new auto insurance.

What if I don’t have full coverage on a financed car?

Lenders want the vehicles they finance to be protected in the event of an accident or theft. Failure to keep that protection—whether because you don’t pay your premiums or because you cancel the policy—is a breach of contract with the lender. They could repossess your car, require you to pay the loan off in full or cancel the loan entirely.

If your lender finds out via your insurance company or the DMV that you’ve dropped full coverage, they may contact you to ask you to fix this mistake. Failure to do so could allow them to purchase “force-placed insurance” and add it to your loan costs.

What happens after I pay off my financed vehicle?

Once your loan has been paid off, your insurance options open up. You could choose to drop full coverage on your vehicle in favor of a less expensive liability-only policy. If your vehicle retains its value well, you may not want to do this. 

On the other hand, if your car’s value is less than the deductible for filing a claim, full coverage may not make sense. If you have questions about how much coverage to buy for a car, it’s best to ask a professional.

SelectQuote Can Help you Find Affordable Full Coverage for Your Financed Car

Whether you’re buying a brand new car or financing a used vehicle, finding the right kind of affordable full coverage is important. At SelectQuote, we shop for auto insurance from some of the most trusted insurance companies in the nation. We look at all available rates and discounts to help find you the best deal.

1https://www.statista.com/statistics/453000/share-of-new-vehicles-with-financing-usa/
2https://www.iii.org/fact-statistic/facts-statistics-auto-insurance

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