Is it Mandatory to Have Auto Insurance When Financed?

If you’re planning to buy a car on credit or loan, you might be wondering whether it is mandatory to have auto insurance. Most dealerships require you to show proof of insurance for purchasing a car on credit. There is always a substantial risk of accidental damage to the vehicle.

When a dealership sells you a car on credit, it is still their investment until you pay the full price for the car. So, until the loan is repaid, any damage to the car is a risk for their business, and that’s why it’s necessary for you to have an active auto insurance policy to finance a car on credit.

Why is It Necessary to Have Auto Insurance When Financed?

Most dealerships or financial institutions won’t approve your credit loan unless you show proof of auto insurance. Apparently, there are multiple reasons why you need to have auto insurance when financed. Here are the 3 main reasons as follows.

To Protect the Lender’s Investment

As long as you haven’t paid the car’s full price, or to be more specific the loan amount for purchasing the car, it isn’t your property. It still belongs to the dealership or the bank. So, if the car gets damaged due to an accident, or due to any unprecedented incident such as a flood, storm, earthquake, or a fire outbreak, it is a huge financial risk for the lender.

From the lender’s perspective, the car is typically an investment, and you’re periodically paying for it. With an active auto insurance any damage would be compensated by the insurer, even if the car gets wrecked or stolen.

Avoiding Hefty Out of Pocket Expenses to Repay Due

Suppose you purchase a car without auto insurance, and then you run into an accident, and it gets damaged, or wrecked. Or, what if it’s stolen? In this case, technically you’d be held financially liable to the dealership or financial lender.

When you’re financing a car on credit, you basically agree to repay them in due time. Now if the car needs repairing, or if it’s damaged to the point where it’s beyond repair, you would still have to pay the outstanding amount for the car.

If you’re uninsured, you would have to pay out of pocket, but if you’re unable to afford that then it can lead to a huge financial burden. So, that’s why it’s crucial to stay insured while purchasing a car on credit or loan.

Legal Consequence

There are serious legal consequences especially when you’re dealing with loan purchases. Let’s say you have acquired the car on credit, and somehow it gets damaged, totaled, or stolen.

You would still have to repay the outstanding amount that you owe to the dealership or your financial lender. However, as you don’t have auto insurance, and you don’t have the financial capability to compensate the damage.

So, in this case if you’re unable to pay in due time, then there’s a high chance that you may get sued, and that will add a much higher financial burden with numerous legal complexities.

Financial Assurance

When it comes to financing a car on loan, the most crucial aspect is financial assurance. By having an active auto insurance, your lender would know that you can pay for the car’s repair and replacement cost. Similarly, you would also be assured that if something happens to the car, you can financially compensate for the damage without any hassle.

As there’s always a high financial risk for purchasing a car on loan, auto insurance is crucial to ensure financial assurance. Plus, it is a substantial requirement to protect yourself financially, and to stay legally compliant.

Types of Auto Insurance Coverages Required for Financing a Car on Credit

When it comes to purchasing insurance, there are several types of auto insurance coverages. For financing a car on credit, you only need a few types of auto insurance. Keep in mind that the mandatory liability auto insurance is not required by financial lenders, particularly because that’s your liability to the other driver to compensate their bodily injuries, vehicle, and property damage.

Auto dealerships or financial lenders only want to ensure that their vehicle gets damaged in some way. Again, as long as the full amount for the car is paid, the vehicle still belongs to the financial lender. So, most auto dealers and financial lenders require the following types of auto insurance coverage.

If you’re looking for reliable and affordable auto insurance at a reasonable rate in Michigan, consider checking our auto insurance solutions. We have all the auto insurance coverages you need to finance your car. For a more detailed understanding, you can visit our regional offices in Flint MI, Saginaw MI, and Mt Pleasant MI.

Collision Auto Insurance

Collision auto insurance is designed to financially protect your car when you accidentally collide or crash with another vehicle, object or tree, regardless of whoever is at-fault for the accident.

If your car gets damaged by accidentally colliding with another vehicle or object, your insurer will cover your car’s repair and replacement cost up to your coverage limit. Car accidents are very common in the US with over 6 million car crashes occurring every year on average.

So, that’s why having collision auto insurance is required by most auto dealers or financial lenders in the US.

Comprehensive Auto Insurance

You also need to have comprehensive auto insurance to finance a car on credit, this is essentially because comprehensive auto insurance financially protects your car from unprecedented incidents that are beyond your control.

These unprecedented incidents include theft, along with damage due to vandalism and severe weather conditions. Similarly, like collision auto insurance, comprehensive auto insurance also covers your car’s repair, and replacement costs up to your coverage limit.

Gap Insurance

Auto dealers wouldn’t ask you to acquire gap insurance unlike collision, and comprehensive insurance. But it’s highly recommended to have gap insurance when you’re financing a car on loan.

Gap insurance has been mainly designed to financially protect yourself when you’re financing a car on loan as it pays the car’s actual cash value (current market value) and the additional outstanding that you owe your insurer.

For example, suppose you financed a car for $35,000. After three years, its market value drops to $30,000, but you still owe $5,000 on the loan. Without gap insurance, you’d have to pay that $5,000 out of pocket. With gap insurance, your insurer covers both the $30,000 market value and the remaining $5,000 loan balance, ensuring you don’t suffer a financial loss.

The gap insurance is crucial if your car gets stolen, or damaged to the point beyond repair. This is a great add-on auto insurance coverage along with collision and comprehensive insurance.

What is the Average Cost of Auto Insurance When Financed?

Typically, you will have to get full coverage auto insurance when you’re financing the car on loan. Full coverage insurance mainly includes a combination of mandatory auto insurance coverage with multiple optional auto insurance coverages such as liability auto insurance, collision auto insurance, and comprehensive auto insurance.

You can add more optional auto insurance coverages with your full coverage auto insurance policy. In the US, the annual cost of full coverage auto insurance is $2,670 per year.

How to Reduce the Cost of Insurance for Financed Vehicle?

Even though you’re financing a car on loan, you would still need to spend around $25,000 and above. Paying the car’s price in installment can itself be financially straining, so that’s why it would be easier and more convenient if you could save on the auto insurance rate. Here are some effective tips to reduce the cost of insurance for a financed car.

• Search, and compare multiple insurance companies
  Contact at least 5 insurance companies and get a quote from each
  Negotiate the auto insurance premium, and bid the lowest rate
  Maintain a clean driving record
  Sign up, and complete a safe driving course
  Take advantage of low-mileage discounts (telematics insurance)
  Seek discounts and other bundle offers
  Opt for supplemental spouse auto insurance (if applicable)
  Go for higher deductibles (up to the amount that you can afford)

The Bottom Line

You will mainly need collision auto insurance, and comprehensive auto insurance to purchase a car that’s financed on loan. Apart from these two types of auto insurance coverage, you can add gap insurance for better financial protection.

Typically, these three optional auto insurance coverages are legally optional throughout the US. But most car dealerships and financial lenders insist on showing that you have collision auto insurance, and comprehensive auto insurance.

If you’re purchasing a car on credit or loan, it’s recommended that you get these three types of auto insurance before buying the car. In this way, you can instantly purchase the car of your choice without any hassle or having to wait.

The best part about purchasing car insurance is, it takes about 30 minutes to a few hours to get a car insurance policy and have it activated. So, it doesn’t take too long to get auto insurance unless there’s an issue with your driving record, vehicle, or any information that you have provided.

If you’re financing a car on loan, and if you’re searching for the best auto insurance coverage at the most reasonable rate, contact us to get a free quote and consultation today!

FAQ

Do you need insurance when financing a car?

Most auto dealerships, and lenders require proof of auto insurance to protect their investment in case of an accident or theft.

What happens if you don't have car insurance when buying a car?

If you’re buying a car from an individual or an auto dealership that allows you to purchase a car without auto insurance, then it shouldn’t be a problem. However, you cannot transfer ownership nor register a car under your ownership without proof of auto insurance. Plus, you cannot drive on the streets legally without an active car insurance policy. Typically, most dealerships, or financial lenders require proof of auto insurance to protect their investment and minimize risks. 

What happens if you total a financed car with no insurance?

If you total a financed car then you need to pay the entire repair expense, and outstanding amount out of your own pocket.    

Can you remove insurance on a financed car?

Yes, you can cancel insurance any time even on a financed car, but you shouldn’t because there’s always a substantial risk of accidental damage or theft.