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Insurance coverage for a financed car: what to know

For many Americans, a car is among their most costly purchases. So it's unsurprising that many car owners choose to finance their vehicle via an auto loan, rather than purchasing the car upfront at full cost. The nature of auto financing has some insurance implications. Failure to understand these differences can leave you vulnerable.

Let’s explore how to get insurance for a financed vehicle.


What insurance do you need for a financed car?

Driving a financed vehicle impacts your insurance coverage options. The party furnishing the loan has a vested interest in the well-being of the vehicle, so it will require the maintenance of full coverage. Having only the state minimum amount of liability insurance won't be sufficient. Full coverage car insurance includes the following:

Another coverage option worth considering is gap insurance. This add-on covers the gap between what is owed on your car loan and depreciation (what your insurance company will factor when they pay out your claim). This reduces the likelihood of your being financially underwater on your car loan if you get in an accident.


Financing a car: what to know

Once you find the new car of your dreams, you need a way to pay for it. That can mean using your savings account, or it can mean taking out a loan. If you’re using a car loan from the bank or a dealership, your vehicle is "financed" — you borrow the amount needed to pay for the vehicle and you pay the bank or dealership back, usually with interest. Here are some key definitions to remember when considering a car loan.

  • Loan principal/financed balance: The amount you borrow
  • Interest rate: Percentage of the loan you must pay back in addition to the car loan principal
  • Loan term: The length of time it takes to pay off your car loan

The amount of these values depends entirely on you, your credit score, and the dealership or bank with which you partner. As a general rule of thumb, try to get the shortest loan term with the lowest interest rate and the smallest car loan principal.


Is insurance more expensive for financed vehicles?

In short, no. While your insurance rate reflects many factors, it doesn’t increase or decrease only on the basis of the car's financed or leased status; it may instead be pricier — especially if you're used to carrying just the state-mandated minimum — due to your lender's requirement that you carry full coverage insurance for your financed vehicle. You also need to inform your insurance company if you’re financing the vehicle with a lienholder.

Usually, the agency financing your vehicle will want to be listed on the auto insurance policy as a loss payee or an additional interest. They may require proof of your having done this.

How much will full coverage car insurance cost? Below are average rates for a full coverage policy, comparing $500 and $1,000 deductibles.

Can I get liability insurance on a financed car?

Liability coverage is required by almost all states in order to be a legal driver. However, some states have other requirements, which may include underinsured or uninsured motorist coverage, personal injury protection (PIP), or other types of insurance.

Carrying liability coverage is required, though you are not required to carry more than the state-mandated coverage limits. In states where liability is the only required insurance coverage, carrying the minimum coverage still may not be enough. Drivers who finance their vehicle may face further requirements from their lender, as most require active collision and comprehensive coverages.

Check the terms of your loan agreement to see the coverage requirements.

AVERAGE CAR INSURANCE RATES BY COVERAGE LEVEL PER ANNUAL POLICY
Company Coverage Level Avg. Annual Premium
Allstate Full coverage w/$500 deductible $2,413
Allstate Full coverage w/$1000 deductible $2,118
Farmers Full coverage w/$1000 deductible $1,616
Farmers Full coverage w/$500 deductible $1,786
GEICO Full coverage w/$1000 deductible $1,348
GEICO Full coverage w/$500 deductible $1,542
Nationwide Full coverage w/$500 deductible $1,476
Nationwide Full coverage w/$1000 deductible $1,343
Progressive Full coverage w/$500 deductible $1,886
Progressive Full coverage w/$1000 deductible $1,668
State Farm Full coverage w/$500 deductible $1,569
State Farm Full coverage w/$1000 deductible $1,457
USAA Full coverage w/$1000 deductible $1,189
USAA Full coverage w/$500 deductible $1,365
Updated: 09/22/22.

Dynamic auto insurance data methodology

Methodology: The auto insurance rates displayed above and throughout this page are dynamic, meaning the data will refresh when the most recent information is made available. Rates are based on a sample driver profile — a 30-year-old single male driver with a Honda Accord and full coverage. This profile was adjusted based on common pricing factors used by major car insurance companies, like age, coverage level, driving record and others.


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What’s the difference between leasing and financing a car?

The primary difference between leasing and financing is the ownership of the vehicle. By financing through a bank or the dealership, you make payments in order to own the vehicle over time.

Over the length of your car loan, you gain equity in the car as long as you continue to pay your installments. That’s the benefit of financing — you own the vehicle. This can come in handy if you’re planning on selling the vehicle in order to make a down payment on another vehicle in the future.

With a lease, you make monthly payments but must return the vehicle after the end of your lease.


Which is better: dealership financing or a bank auto loan?

While the decision is up to you, you have options when it comes to the party through which you obtain an auto loan. Here are some things to consider when considering financing your vehicle.

Financing through the dealership
Financing through the dealership

Going through the dealership from which you initially purchased the car is typically considered the easiest way to finance an auto — but that doesn’t mean it's cheaper. You’re already at the dealership getting the vehicle: if you finance through the dealer, you can drive away with the vehicle after you’ve purchased insurance.

But the dealership's offered interest rate might be higher than a bank's. Dealerships sometimes offer bank financing with a markup up front. These rates may be negotiable.

Some dealerships offer promotional benefits — such as 0% interest financing — a bank might not be able to meet.

Financing via a bank auto loan
Financing via a bank auto loan

A bank may offer a more personalized car loan experience. If you use the bank with which you hold accounts, the bank might be willing to work with you if you fall behind on your payments. Gather information via a pre-authorization — which will list the interest rate of the car loan — prior to making a decision. Calculate how much interest you'll pay on the auto loan over time and let the numbers guide you.


How to save when financing a car

When you’re on the hook for car payments and insurance premiums each month, saving money is important. Let’s break down some quick and easy ways to save:

Pay your insurance bills up front

If you’d rather pay your insurance premium as one bulk amount, you can save an average of $85 per year. That way, you only have to worry about paying your car loan monthly. If this proves too great a financial burden, you can save by paying with transfers out of your bank account (called Electronic Funds Transfer, or EFT).

 

Bundle your insurance policies

Bundling your renters or home insurance policy can save you money on your auto insurance.

 

Drive safely

Because of the relationship between you and whoever is financing your car loan, it's important to keep the vehicle in good condition. Additionally, accidents and citations can have big impacts on your premium. For most violations and accidents, you’ll be rated, i.e., charged for three years by your insurance provider.

Consider telematics

If you’re a low-mileage and dependable driver, you might consider usage-based insurance as a money-saver. Telematics-based insurance uses in-car devices or apps that track the way you drive to help assign your premium.

 

Compare insurance policies

It’s important not to become complacent with your insurance company. Checking quotes every six months is a great way to potentially save on auto insurance. 


Car insurance for a financed vehicle: summary

It’s important to keep all your bases covered when it comes to auto insurance coverage. Making sure your vehicle is physically covered through comprehensive and collision coverage is a great way to start. Adding gap insurance can help protect you from depreciation but it can be pricey.

Your best bet is to compare rates from multiple insurance companies to find the right coverage at the right price. 

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RECENT QUESTIONS

How long do I have in Nevada to add a car to my policy

To my knowledge, there isn't a law in the books regarding a grace period for adding a new vehicle to an existing policy in Nevada. However, most insurance do have a certain grace period in their policy documentation that allows for extended coverage to newly purchased vehicles.
Jun 8, 2018 Las Vegas, NV

My car was a total loss. Will the other insurance send the money to my lienholder?

Sorry to hear about your situation. I would check with your gap coverage provider.
Mar 11, 2020 Columbus, OH

We will be purchasing our first car shortly before moving from WI to CA. How should we navigate car insurance?

Every state has separate laws, insurance plans, and registrations, but you shouldn't have an issue buying a vehicle in one state and moving to another state. If at all possible, I would wait and buy the vehicle in California — this way, you would only pay all the fees once.
Aug 19, 2019 Milwaukee, WI

A friend is purchasing a car for me tomorrow, I'm wondering if there is a temporary policy I can get through the dealership until I can shop for my own policy?

Temporary car insurance doesn't really exist. You will likely have to get a Texas auto insurance plan before they let you leave with the vehicle.
Oct 3, 2019 Katy, TX

Renata Balasco photo
Renata BalascoContent Strategist

Renata joined The Zebra in 2020 as a Customer Experience Agent. Since 2021, she has worked as licensed insurance professional and content strategist. Her expertise in property and casualty insurance informs her work in creating expert home and auto insurance guides to educate shoppers. 

Renata previously worked as a content specialist for Lifespan, the largest hospital system in the state of Rhode Island. She holds a bachelor’s degree in French Language and Communications from The University of Rhode Island.

Renata's work has been cited by Car and Driver, The Balance and Fox Business

About The Zebra

The Zebra is not an insurance company. We publish data-backed, expert-reviewed resources to help consumers make more informed insurance decisions.

  • The Zebra’s insurance content is written and reviewed for accuracy by licensed insurance agents.
  • The Zebra’s insurance content is not subject to review or alteration by insurance companies or partners.
  • The Zebra’s editorial team operates independently of the company’s partnerships and commercialization interests, publishing unbiased information for consumer benefit.
  • The auto insurance rates published on The Zebra’s pages are based on a comprehensive analysis of car insurance pricing data, evaluating more than 83 million insurance rates from across the United States.