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Car insurance for a financed vehicle

Aside from your residence, your car could be among your most costly possessions. So it's unsurprising that many car owners choose to finance their vehicle via a loan, rather than purchasing the car upfront at full cost. The nature of vehicle financing has some insurance implications. Failure to understand these differences can leave you vulnerable.

Let’s explore the ins-and-outs of insuring a financed vehicle.

 

How to navigate insurance with a bank auto loan

 


 

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

AVERAGE CAR INSURANCE RATES BY COVERAGE LEVEL PER 6-MONTH POLICY
Insurance Company$500 Deductible$1,000 Deductible
Allstate$1,011$878
GEICO$602$533
Farmers$822$716
Liberty Mutual$863$767
Nationwide$714$640
Progressive$809$716
State Farm$647$589
USAA$545$476

 

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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. Throughout 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

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 them, you can just drive away with the vehicle after you’ve added the insurance. But the dealership's offered interest rate might be higher than a bank's. Oftentimes, dealerships simply offer bank financing with an upfront markup. 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

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 upfront

If you’d rather pay your 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).

ANNUAL SAVINGS BY PAYMENT METHOD: INSURANCE PREMIUMS
Paid-in-full savingsEFT savings
$85$24

 

Bundle your insurance policies

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

ANNUAL SAVINGS VIA BUNDLING: INSURANCE PREMIUMS
Savings with rentersSavings with home
$79$149

 

Drive safe

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 company.

AVERAGE INCREASE IN AUTO INSURANCE PREMIUM AFTER INCIDENTS
Accident/violation6-Month premium increase
None 
Speeding 11 - 15 MPH Over Limit$168
Speeding 16 - 20 MPH Over Limit$192
Speeding 21 - 25 MPH Over Limit$230
At-Fault Accident$383
Reckless Driving$519
Racing$565
DUI$549

 

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.

TYPICAL SAVINGS VIA TELEMATICS
CompanyEstimated Savings
Progressive's SnapShotAverage of $130
Allstate's DrivewiseAverage of 10-25%
State Farm's Drive Safe & SaveUp to 15%
Esurance's DriveSenseVaries
Nationwide's SmartRideUp to 40%
Liberty Mutual's RightTrackAverage of 5-30%
GEICO DriveEasyVaries

 

Shop around

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

 


 

Summary: car insurance for a financed vehicle

It’s important to keep all your bases covered when it comes to insurance. 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 shop around with as many companies at once to see the coverage you want and need a price you can afford. Enter your zip code below to compare and find the most affordable rate with the coverage you need.

 

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Recent Questions:

Car Insurance for a Financed Vehicle

Will gap insurance pay out if I buy the salvaged vehicle from the insurance company?

Your gap coverage should still cover the $2,000 owed on the loan regardless of what happens after that. I would definitely check directly with your insurance company to make sure there is no stipulation that prevents this if you choose to buy back the salvage title. If you have any questions, feel free to ask.

Can force-placed car insurance be removed on a car that does not work?

Most loan terms require that the financed vehicle must carry the comp and collision coverage. Even if the vehicle is broken-down and non-functioning, you still have to follow the stipulations set by your lienholder.

Can force-placed auto insurance be removed/refunded from a loan? If so, to what extent?

Yes, you should be reimbursed if you were actively insured during that time. I would call the carrier you had and make sure the lien info is listed correctly, and then obtain all declarations and a letter of experience.

How do you insure a car that is not being driven but is held for collateral by a bank?

Whether or not the vehicle is being driven, you still need the state minimum liability coverage — in Mississippi, the state-required liability limits are 25/50/25, meaning you are required to carry $25,000 per person and $50,000 per accident of bodily injury coverage and $25,000 in property damage coverage. In most cases, if the vehicle is used for collateral for a loan, the loan company will require you to have comprehensive and collision coverage to protect your vehicle.

Ava Lynch LinkedIn

Based in Austin, TX, Ava has been in the insurance industry as a licensed agent for 4-plus years. Ava is currently one of The Zebra’s resident property insurance experts and has been featured in publications such as US News Report, GasBuddy, and Yahoo! Finance.