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How having an auto loan affects car insurance

Fact-checked with HomeInsurance.com

You might wonder if having an auto loan impacts your insurance costs. The answer is: yes, but not the way you might think. Having an auto loan usually doesn’t make the insurance company charge you more for the same policy.

What a loan does is add additional coverage requirements to your policy — mainly collision and comprehensive — so the financial institution your loan is through covers its investment. After all, by financing all or part of the vehicle’s cost, your lender is a co-owner. 

Is car insurance cheaper if you own the car and don’t finance? Yes, because you can reduce your coverage to the minimum required in your state. Let’s take a deeper look.

Do lenders require insurance coverage on a financed car?

All states, except New Hampshire, require a minimum amount of coverage for registered vehicles. That coverage is usually liability and medical coverage. Liability coverage pays on claims made by the driver of the other car, to cover medical expenses and property damage from an accident. Medical coverage will cover you and any guest passengers in your vehicle.

Your state doesn’t require comprehensive and collision coverage, but your finance company will require these coverages. 

Insurance requirements on a financed car

Your lender has insurance requirements for financed cars because the state’s required coverage won’t pay for your car’s damage from an accident — and as a partial owner of the car, it wants to be sure it is protected.

What are collision and comprehensive coverage?

  • Collision insurance will pay for damage to your car in an accident, no matter who is at fault. It’s limited to damage that occurs while the car is moving: from an accident with another car to a single-car accident where you hit a light post. 
  • Comprehensive coverage pays for damage to your car for instances like weather disasters, fire or hitting an animal. It may even pay for a chipped windshield — and many policies do so without a deductible.

In general, however, your collision and comprehensive coverage will require a deductible, which you choose when you purchase your policy. A deductible is the amount you’ll pay before your coverage kicks in, and can be anywhere from $50 to $2,000 or more

How having a loan impacts your rates

Additional coverage means additional premium costs, so your monthly bill will be more when you have comprehensive and collision coverage. Collision is usually more expensive than comprehensive, but together they can increase your policy costs by several hundred dollars a year.

So the addition of collision and comprehensive coverage, as required by your lender, will impact your rate. You’ll also want to check with your lender when you purchase the car to see if there are any additional requirements it might have.

Reduced coverage during non-use months

If you have purchased a car only for use during a certain time of the year, you may have one way to save on insurance premiums. Let’s say you buy a small truck with good traction for use during the snowy winter months. 

Your lender may allow you to carry a limited policy with only comprehensive coverage during the months when the truck is in storage. However, it may require you to keep the truck in a garage or other covered facility.

If your lender is open to letting you reduce coverage, you’ll need to call your insurer and let it know you will not be driving the truck during the summer. It’s a bit of extra work but could save you hundreds of dollars if your lender allows it.

What happens if your insurance lapses?

If you’ve thought about letting your insurance lapse by not paying the premiums: don’t. Especially when you have a financed car. When you bought the car, you named your lender as a loss payee or additional insured for the car. This designation is listed on your car’s title and is known to your DMV and your insurer. 

It means that if you let your insurance lapse, your lender will find out about it. A lapse puts your lender in a bad position, since it needs your car to be protected from damage. It may respond by requiring you to pay off the loan, by repossessing the car or by increasing your monthly payment to provide coverage for your vehicle.

At the very least — let’s say you get in a temporary bind and can’t pay your premium — you’ll incur late fees or other coverage changes. You’ll probably be given a grace period if you miss a single payment, but don’t expect much beyond that.  

How to save money on car insurance

If you’re paying a lot for your car insurance to satisfy your lender, don’t despair. There are still steps you can take to lower your premium costs.

  • Shop around for insurance: don’t assume that the same coverage at different insurance companies will cost the same. Get a minimum of three quotes before you choose your company.
  • Ask about discounts: most major insurers feature multiple discounts, which can range from paying your premium online to a good driver discount for going without claims. These discounts can decrease your costs significantly.
  • Bundle your car insurance: usually, if you have multiple policies with one company, you’ll earn a lower rate.
  • Avoid risky driving: you may not think it’s a big deal to have a few points on your license, but your insurer does. If you get assigned to the high-risk pool, you won’t qualify for low-cost premiums, and may even risk being turned down for a policy.
  • Settle on a lower-priced car: there are many advantages to driving a $70K Tesla, but low insurance costs isn’t one of them. Driving a modest car, even if you can afford more, is a good way to keep insurance costs reasonable.
  • Maintain a good credit score: If your credit score is low, you’ll pay top dollar for your policy, because your insurer will consider you at risk of non-payment.

Does paying off your car affect your insurance? Yes, it can decrease insurance costs by keeping state-mandated coverage, and eliminating collision and comprehensive coverage.

The takeaway

Financing your car means a higher insurance premium.

  • When financing a car, your lender will require collision and comprehensive coverage — also called full coverage.
  • Collision and comprehensive repair your car in the event of an accident or mishap.
  • Full coverage will increase your premium costs.
  • Reducing coverage may be possible at times when you’re not using the car.
  • Discounts and other savings options can save money.

When you finance a car, your lender is a part owner of the car until the loan is paid off. It will require comprehensive and collision coverage to protect the car in case of an accident, weather disaster or other mishaps.

The additional coverage types will cost more, but you can take steps to keep costs as low as possible. If the car is a seasonal vehicle, you may also save when you’re not driving it. Does car insurance go down once the car is paid off? Yes, if you eliminate comprehensive and collision and only purchase a liability policy.

Mary Van Keuren

After 30 years as a writer and editor in academia, Mary now writes full-time for the insurance and finance industries. Her work has appeared on Reviews.com, TheSimpleDollar.com and Bankrate.com, as well as other consumer-focused websites.

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