Whether you financed via bank auto loan or through the dealership, there are some things to remember when insuring your car.
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 an auto 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.
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.
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.
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.
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.
| 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 |
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. Therefore, 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. Those who finance their vehicle may still face further requirements from their lender, as most will require you to carry collision and comprehensive coverage. This is to protect their investment should you face an accident. The best way to see about this is to check the terms of your loan agreement to see the coverage requirements.
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.
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.
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.
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.
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:
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).
| Paid-in-full savings | EFT savings |
|---|---|
| $85 | $24 |
Bundling your renters or home insurance policy can save you money on your auto insurance.
| Savings with renters | Savings with home |
|---|---|
| $79 | $149 |
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.
| Accident/violation | 6-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 |
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.
| Company | Estimated Savings |
|---|---|
| Progressive's SnapShot | Average of $130 |
| Allstate's Drivewise | Average of 10-25% |
| State Farm's Drive Safe & Save | Up to 15% |
| Esurance's DriveSense | Varies |
| Nationwide's SmartRide | Up to 40% |
| Liberty Mutual's RightTrack | Average of 5-30% |
| GEICO DriveEasy | Varies |
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.
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 shop around with as many insurance companies at once to find the right coverage at a price you can afford. The Zebra can help you find insurance quotes from top companies. Enter your ZIP code below to compare and find the most affordable car insurance coverage for your needs.
