If you’re still paying off your auto loan, you need to have full coverage car insurance. Full coverage is the most protection you can have on a vehicle. But what happens if the policy gets canceled or you switch to just a liability policy? Here’s what you need to know.
Why Do I Need Full Coverage on a Financed Car?
The guidelines and requirements for full coverage insurance vary by state. Full coverage auto insurance usually is a combination of liability, comprehensive, and collision coverage. Some form of liability coverage or proof of financial responsibility is required in all 50 states if you have a car.
If you own the vehicle, you can choose whatever car insurance coverage you would like, as long as it fits within your state’s minimum requirements. In other words, you can choose the bare minimum auto insurance policy if you owe nothing on the car.
However, when you finance a vehicle, it’s a different story. Lenders require borrowers to maintain full coverage insurance on their cars. Lenders do this so they can recover the vehicle’s value in the event of an accident or theft. They want the car to be protected to the fullest extent because it’s still their asset, until the borrower pays it off.
What Happens if Full Coverage Is Removed?
Removing full coverage insurance from your vehicle during an auto loan is a violation of your loan contract.
Whether you miss some insurance payments or purposefully cancel the full coverage policy, the insurance company contacts the lender to alert them once your insurance lapses. Because the lender is the lienholder, the car is their asset – you don’t actually own the vehicle until it’s paid off.
Once the car is no longer covered, your lender will contact you and state you’re in breach of contract. If this isn’t resolved right away, the lender is likely to pick an auto insurance policy and add it to the cost of your loan. This is frequently called force-placed coverage.
Policies added by lenders are normally more expensive than regular full coverage insurance, and it may not cover personal items or owner liability in the case of an accident or theft.
As We See It
It’s in your best interest to shop around and choose the full coverage car insurance policy that best fits your budget. While simple liability insurance is typically cheaper than full coverage, if you have a financed vehicle, full coverage is mandatory.
If you’re looking to finance a car but find you can’t afford the full coverage auto insurance with the loan payment, perhaps we can help. At Auto Credit Express, we’ve teamed up with dealerships coast-to-coast that specialize in helping buyers with less than perfect credit.
To get started, take a minute to fill out our free car loan request form and see if there’s a dealer in your local area that may be able to lend a hand.