There are many decisions to make when purchasing a new car, one of the most important being how to pay for it. If you’ve decided to finance your vehicle, you’re not alone—84% of all new vehicle purchasers in 20221 chose some kind of financing. You may be wondering how much auto insurance coverage you’ll need for your financed car.
The minimum legal requirement for liability insurance coverage is often not enough for vehicles that are purchased with a loan or are leased. Your lender wants to protect their investment, so they’ll typically require even more auto insurance coverage. In this article, we’ll walk you through coverage requirements for financed cars to help you make decisions about auto insurance 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?
The average insurance rate for full coverage auto insurance varies depending on many factors, including the vehicle make and model, your driving history, zip code, marital status and more. It’s estimated that full coverage auto insurance costs an average of $2,014 a year, or $168 per month. Keep in mind that simple actions like driving safely, parking your vehicle in safe places and choosing a higher deductible can all help you lower the cost of your auto insurance premium.
Gap Insurance Fills Coverage Gaps Left By Full Coverage Insurance
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 as gap insurance is typically more expensive when purchased from a dealer. Your premiums will also be rolled into the total financed cost of your vehicle, making 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. Force-placed insurance will typically cost you even more than a standard full coverage policy that you purchase on your own.
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
If you’re looking for affordable full coverage auto insurance for your new vehicle, we can help. At SelectQuote, we quickly and efficiently search a wide variety of highly-trusted insurance carriers, finding you the right fit for your needs and budget. We do the shopping for you, saving you time so you can drive your new vehicle with peace of mind knowing you’re protected.