Can I Get Liability Insurance on a Financed Car?

Most lenders require full coverage car insurance for financed vehicles. As long as you're still paying off your loan, your financed car must be equipped with full coverage (including liability, collision and comprehensive insurance) to safeguard the lender's investment.

However, the moment you've settled your loan and the car is entirely in your name, you can adjust or even drop certain coverages.

If you breach your loan agreement by opting for only liability insurance, your insurance provider might alert the financing company. In response, the lender could procure force-placed insurance, and you'll be responsible for the bill.

• Do You Need Full Coverage on a Financed Car?
• What Does It Mean to Finance or Lease a Car?
• What Happens to My Car Insurance Policy When My Car Is Paid Off?
• What’s the Difference Between Insuring an Owned Car vs. Financed Car?
• FAQs

Yes, you usually need full coverage on a financed car. Until your loan is fully settled, the lender has a vested interest in your vehicle. Think of it as their safety net. Should anything unexpected happen to your car, they want assurance that its value is protected. That's where full coverage insurance comes in.

Lenders require full coverage insurance on financed cars because they want to protect their investments. If your vehicle is totaled or stolen, the lender will want to be reimbursed for the outstanding loan balance. If you only have liability insurance, the lender will not receive reimbursement for your stolen or totaled car.

The coverage required for a financed car typically goes beyond the state minimum car insurance requirements. While each lender may have its own specific requirements, most will insist on full coverage insurance to protect their investment. Here's what "full coverage" generally entails for a financed car:

It's essential to read your financing agreement carefully and discuss with your lender to understand their exact insurance requirements. While the above components are standard for full coverage, your lender might have specific stipulations about deductibles or additional coverages.

Once your car loan is paid off, the requirement for full coverage set by the lender goes away. However, whether to keep full coverage at that point becomes a personal decision based on the value of the car, your financial situation and your risk tolerance.

You're likely violating your loan agreement if you only have liability insurance on a financed car. Lenders typically require full coverage insurance on financed vehicles to protect their investment.

Here's what can happen and the implications of carrying only liability insurance on a financed car:

Maintaining the required insurance on a financed car is essential, not just for the sake of the loan agreement but also to protect yourself from significant financial setbacks. If you're struggling with the cost of full coverage, it's worth shopping around or speaking with an insurance agent to find more affordable options or discounts.

Yes, you typically need full coverage on a used financed car. When a vehicle is financed, regardless if it's new or used, the lender will want to protect their investment.

Most loan agreements, whether for new or used vehicles, stipulate that the borrower must maintain comprehensive and collision coverage, which are the primary components of full coverage. This requirement is in place to protect the lender's collateral (the car) from potential losses.

Especially with used cars, which can depreciate faster than new ones, there might be a significant gap between what you owe on the loan and the car's actual cash value. Some lenders might also require or recommend gap insurance to cover this difference in case of a total loss.

Financing and leasing a car are two common ways to obtain a vehicle without paying the full purchase price upfront. However, with a financed car, you will become the owner after making all your payments. When you lease a car, the lessor remains as the vehicle's owner.

In either scenario, you'll typically be required by financial companies or lessors to buy full coverage car insurance.

Once your car is paid off, the lender's insurance requirements no longer apply. This means you're no longer mandated to carry comprehensive and collision coverage as part of your policy unless you choose to.

Without the obligation to maintain full coverage, you can reduce your coverage, leading to lower insurance premiums. For instance, you might decide to drop collision coverage, especially if your car is older and its value has depreciated significantly.

If you carry gap insurance (which covers the difference between the car's actual cash value and the loan amount in case of a total loss), you no longer require it once you've fully paid off your vehicle. You can cancel this coverage.

It's a good time to assess your insurance needs. While you can reduce coverage to save money, consider the potential out-of-pocket costs if your car is damaged or totaled. Comprehensive and collision coverages can still be beneficial, especially if replacing or repairing your vehicle would be a financial strain.

No, paying off your car doesn't automatically result in lower car insurance premiums. However, it does grant you the flexibility to modify your coverage, which could lead to potential savings. Once your car is paid off, the lender's insurance requirements are lifted. This means you can drop comprehensive and collision coverages, particularly if your vehicle is older. Opting for this can decrease your premium but also introduce more risk. Without these coverages, you won't be compensated for damages or theft.

If, after evaluating how much insurance you need, you determine that the cost of full coverage exceeds your car's value, you can consider switching to liability-only insurance. But remember, while owning your vehicle outright offers the chance to adjust coverages and possibly reduce insurance expenses, it's not guaranteed. Always weigh the potential savings against the risks of having less coverage before making any changes to your policy.

Financed cars are typically more expensive to insure because, unlike insuring an owned car, you can’t get away with only equipping it with liability insurance. Lenders have a greater say regarding coverage and almost always require full coverage auto insurance.

The cost of insuring a financed car is a significant factor. It should be considered when deciding whether to take out a loan for a car.

When you finance a car, you're not just committing to the monthly loan payments. The insurance premiums, especially with the requirement for full coverage, can add a substantial amount to your monthly expenses. To offset costs, shop around for policies from at least three providers to find the cheapest full coverage car insurance. Stacking car insurance discounts, like anti-theft or multi-car insurance discounts, can help lower your insurance costs.

MoneyGeek answers commonly asked questions about the type of insurance you need if you have a financed car.