If you’re financing a vehicle, lenders require that you maintain full coverage auto insurance. Even if your car isn't on the road much, you’re going to need to avoid lapsing on your insurance policy, or it could cost you more cash.
Furloughed and Your Car Insurance
When you’ve been furloughed from your job, it's typically known as a temporary leave of absence. Due to the coronavirus pandemic, millions of workers have been laid off, furloughed, or let go. If you’re among that number and aren’t driving due to stay-at-home orders, should you still pay your car insurance premium?
Yes! Even though your vehicle may not be the road, your lender is notified if your auto insurance lapses. Once you signed the dotted line on your car loan documents, you agreed to maintain full coverage insurance while you’re making payments.
If you let your auto insurance lapse while you’re still paying for your vehicle, the insurance company notifies the lienholder (your lender) that the car is no longer covered, because the lender holds a secured interest in the vehicle. In case of accident or theft, your lienholder wants to be sure any damage is covered by insurance.
Full coverage car insurance is typically a combination of comprehensive, collision, and liability coverage:
- Comprehensive coverage – Covering incidents often known as “acts of god” such as: falling trees, hail damage, parking lot damage, or theft.
- Collision coverage – Covers the vehicle in the event of an accident or collision with an animal or other car.
- Liability coverage – Mandatory in most states, and commonly known as PLPD (personal liability and property damage). It's the minimum coverage required on a vehicle, and it covers medical bills and property damage.
Canceling your auto insurance may feel like a good idea if the car isn’t on the road much, but since your lender is notified if the insurance lapses, you end up paying for insurance regardless of if you chose the coverage or not.
What Happens if Coverage Lapses?
If you do allow coverage to lapse, your insurance company notifies the lienholder that the vehicle is no longer covered. Typically, your lender directs you to either reinstate your current policy, or get the car covered by another insurer.
This can also happen if you downgrade your full coverage policy to a basic PLPD policy, as well. While PLPD is the cheapest policy you can usually buy, it doesn’t cover everything. Once your vehicle is paid off, you can opt for the cheapest PLPD insurance policy your heart desires.
However, if you don’t reinstate the full coverage policy on a financed car, your lender can add what’s called force-placed auto insurance and add the cost to your monthly loan payment. In most cases, force-placed coverage is more expensive than a typical car insurance policy, since your lender probably isn’t going to shop around for the best rate. Additionally, many force-placed insurance policies don’t cover things like personal items or individual liability coverage in the event of an accident or theft.
Having Trouble With Auto Insurance
If you’re considering canceling your auto insurance because the payments are too expensive right now, you may be able to change your policy or rearrange the terms depending on your insurance company’s rules. If you’ve been furloughed and you don’t want to risk force-placed coverage, staying in contact with your lender and insurance agent may help you avoid any extra cost.
With so much happening because of the COVID-19 pandemic, many lenders and insurance companies are offering deferment programs and insurance rebates for their customers.
We recommend contacting your insurance agent and letting them know your situation. In some cases, you may be able to lower the cost of your monthly car insurance by changing coverage limits. Some insurance companies offer a lump-sum payment option, which can offer more savings compared to paying month to month.
If you can’t afford the insurance payment and your insurance company can’t do anything for you right now, it wouldn’t hurt to shop around, since there are lots of insurance companies. Just remember that you still need to maintain full coverage while you’re financing your vehicle.
Financing Another Vehicle
If your auto loan and insurance payments are too much to handle right now, it may be worth looking into trading in your current vehicle for something more affordable, since the cost of car insurance varies with the vehicle make and model. If you’re considering getting another car, you can also contact your insurance company and ask what the estimated monthly insurance payment would be if you changed vehicles.
To sum things up, you want to avoid defaulting on your loan, and avoid missing insurance payments. While being furloughed is usually temporary, force-placed insurance is expensive, while missed or late payments can remain on your credit reports for up to seven years.
If you think it’s time for another car, look to us at Auto Credit Express. We’re connected with dealerships across the country, and we match borrowers of all types – no credit, bad credit, unique credit – to dealers near them that work with bad credit lenders. To get connected to a dealership for free, fill out our secure auto loan request form.
