There are minimum car insurance requirements in every state. Financed cars also require these minimum insurance plans.
Then, there are a few optional or add-on insurance plans that protect financed cars in different situations.
What is Car Financing?
Car financing means buying a car with borrowed money from a lender. You do not pay the full car price upfront in cash.
Financing a car incurs interest charges. The lenders require compensation against the money they lend you to buy a car.
You pay in monthly installments over the finance term. Different types of car financing programs cost differently.
The total cost of a car financing program depends on several factors including:
- Your Credit Score
- Your Monthly Income
- Car Price
- Market Interest Rate
- Finance Term
The lenders will own the car until you repay the full car amount. The lender can be a car dealer, a bank, or a credit union.
When Financing a Car, What Insurance Do I Need?
Since you do not own a financed car, lenders require different types of insurance. There are minimum insurance requirements by state and some optional insurance plans that lenders may require in different situations.
Minimum Insurance by State
The minimum insurance coverage is the law that requires car owners to arrange car insurance for different categories.
Each state has its own minimum insurance requirements. The type of insurance for all states is similar. However, the liability coverage amounts for each type of car insurance change by state.
In some cases, you may need full coverage for your car as well. Full coverage of a car means a combination of different insurance plans that comprehensively protect you against all sorts of losses.
Lenders would also require you to cover these minimum car insurance requirements for compliance purposes. As a borrower, you’ll finance the car insurance plans required as a minimum in each state.
Let us discuss the minimum insurance plan types commonly required in all US states.
A comprehensive insurance plan covers damages caused to your car by different elements. It covers damages and liabilities other than common accidental losses.
A comprehensive insurance plan will cover damages caused by:
- Weather incidents like storm or lightening
- Fire incidents
- Animal strikes
It means your financed car would be protected against such unwanted events. The lenders would require you to get a comprehensive insurance plan as one of the main requirements by the state law as well.
It also helps borrowers in bargaining better financing deals as lenders feel secure with a comprehensive car insurance plan as they are protected against perils covered under this insurance type.
A liability insurance plan covers the damages or losses caused by your car to others. It covers your liability towards others in case of an unwanted event happens.
Liability insurance coverage is for the protection of others. It covers damages caused to another vehicle, a person, or property of another person.
Liability insurance is also required by many states by law. It is part of the minimum insurance coverage requirement in most states as well.
The lenders would also require liability insurance from your side when financing a car to you.
Along with the liability insurance, you’ll also need the collision insurance for your financed car.
Collision insurance covers the damages caused in a collision to your own car. A financed car is owned by the lender, so it protects the lenders.
Collision insurance is also part of the minimum insurance coverage plan in most states by law.
Common collision incidents include parking accidents, garage accidents, and pole hits. This insurance protects you from financing losses in such incidents.
Additional Insurances for Financed Cars
Financed cars are supposedly at higher risks than purchased cars. Lenders want to minimize their risks and require different types of auto insurance from the borrowers.
There are some additional types of car insurance plans that many lenders may require you to purchase apart from the minimum insurance coverage plans mentioned above.
Credit Life Insurance
Credit life or simply credit insurance is the insurance that protects lenders if the borrower dies during the loan term. Lenders require it for large loans and from borrowers with risky credit profiles.
Credit insurance is used for large loans including home mortgages and financing a new car. It protects lenders from the non-payment risk of a borrower due to death.
Although it is required by some lenders, credit insurance is costly as compared to other insurance plans.
Credit Disability Insurance
A credit disability insurance is a plan that covers lenders if the borrower cannot repay due to an injury or other reasons.
The disability of the borrower can be physical due to an accident or health issues. However, the insurance appraisers would determine the disability after validation.
A drawback of credit disability coverage is that it is often offered in bundle insurance plans. It is offered by lenders when your financing deal is finalized.
Credit Property Insurance
It is part of the credit insurance that protects your property (or assets) pledged with the lender in case of damages to the property.
A credit property insurance covers natural disasters like flooding, lightning, and storms. It also protects you against theft and accidental losses to your property.
Lenders would feel protected with this insurance plan. The pledged property would lose equity value in case of any damage or losses incurred.
Guaranteed Auto Protection – GAP Insurance
Guaranteed auto protection or GAP insurance is another add-on type of car insurance. It protects lenders from the gap arising in the market value of a car after usage.
New cars lose more face value once they hit the roads than used cars. Therefore, lenders often require GAP insurance for new car financing deals.
It benefits borrowers if your car is totaled. For instance, due to a road accident your car loses around $5,000 value when you sell it, it will be covered by the GAP insurance.
Uninsured Motorist Insurance
Uninsured and underinsured motorist insurance plans are for the motorists that have no or inadequate insurance plans.
This type of car insurance is rarely used for financed cars as lenders would require minimum insurance plans from the borrowers.
Does Financing a Car Affect Insurance Rates?
Car insurance rates include several factors but car financing is not one of them. It means your car financing would not affect the car insurance rates.
Car insurance plans cover the same type of damages or losses regardless of the fact that a car is financed through a loan or purchased outright with cash.
The insurance costs are not included in the car financing deals at first. Most lenders would require you to buy comprehensive car insurance plans as well.
Therefore, borrowers must consider the full car insurance costs on top of their financing costs as well.
What is Car Storage Insurance?
A car storage or parked car insurance is an alternative name to the minimum car insurance plans required for cars that are not in use.
Some states would allow motorists to use these lower insurance coverage plans in certain situations. For instance, when you no longer use an old car but do not sell it either.