There are many decisions to make when purchasing a new car, one of the most important being how to pay for it. If you’ve decided to finance your vehicle, you’re not alone—the majority of new vehicle purchases in 2024 were made with some kind of financing. If you’re considering financing a car, you may be wondering how much auto insurance coverage you’ll need.
The minimum legal requirement for liability insurance coverage is often not enough for vehicles that are purchased with a loan or are leased. Your lender wants to protect their investment, so they’ll typically require even more auto insurance coverage. In this article, we’ll walk you through coverage requirements for financed cars to help you make decisions about auto insurance for your new vehicle.
Insurance Coverage Required by Lenders
When you finance a car, the lender holds a financial interest in the vehicle until you pay it off. To protect that investment, lenders usually require full coverage auto insurance. This typically includes:
Liability Insurance: Covers damage you cause to other people or property.
Collision Insurance: Pays for damage to your car from accidents, regardless of fault.
Comprehensive Insurance: Covers non-collision-related damage (e.g., theft, fire, vandalism, natural disasters).
The goal is to ensure the vehicle is protected, so if it's totaled or stolen, the lender can recover the loan balance through insurance.
Are the coverage requirements different when financing a used car?
No, the requirements are generally the same whether you finance a new or used car. Lenders still expect full coverage to protect their investment. However, the cost of coverage might be lower for a used car due to its reduced market value.
What happens if I don’t have full coverage on a financed car?
Failing to maintain full coverage on a financed vehicle can have serious consequences. Here’s what might happen:
Your Lender Could Buy Insurance For You: Known as forced-place insurance, this is typically more expensive and offers less protection for you.
You Could Violate Your Loan Agreement: This could lead to penalties or even repossession of the vehicle.
You Could Be Personally Liable: If the car is damaged or totaled and you don’t have adequate insurance, you're on the hook for the remaining loan balance.
Your Credit Score Could Be Impacted: Late payments or repossessions related to insurance issues can hurt your credit.
What Full Coverage Auto Insurance Really Means
Full coverage auto insurance for financed vehicles means that, in addition to the regular minimum legally required auto insurance each driver is required to buy, you have purchased other insurance. Most lenders require you to buy additional auto insurance coverage for your financed or leased vehicle: collision coverage and comprehensive coverage. Unlike liability insurance coverage, which covers the cost of another person’s medical bills or damage you cause to another person’s vehicle or property, these coverage types exist to provide payment for repairs or replacement for your vehicle.
Collision coverage and comprehensive coverage aren’t the same thing:
Collision coverage pays for repairs or damage to your vehicle in the event of an accident involving another vehicle.
Comprehensive coverage pays for loss to your vehicle incurred due to an accident involving animals or damage from wind, hail, fallen trees, fire, or theft.
How much does full coverage auto insurance cost?
The average insurance rate for full coverage auto insurance varies depending on many factors, including the vehicle make and model, your driving history, zip code, marital status, and more. It's estimated that full coverage auto insurance costs an average of $2,693 a year, or $224 per month. Keep in mind that simple actions like driving safely, parking your vehicle in safe places, and choosing a higher deductible can all help you lower the cost of your auto insurance premium.
Gap Insurance Fills Coverage Gaps Left By Full Coverage Insurance
In addition to full coverage, your auto lender may require you to purchase gap insurance. Gap insurance coverage is a separate type of insurance coverage that bridges the difference between what your vehicle is worth and what you currently owe on it.
On average, cars will depreciate (lose value) by more than 10% a month after you drive them off the lot, and may even lose 20% of their value after that first year. In the event of an accident, you may find that your insurance company’s full coverage policy will only cover its current value, not your purchase price. Most lenders require gap insurance to cover the remaining amount.
How do I buy gap insurance?
You can buy gap insurance directly from your auto lender, but it’s not recommended, as gap insurance is typically more expensive when purchased from a dealer. Your premiums will also be rolled into the total financed cost of your vehicle, making them subject to interest.
Instead, reach out to your current auto insurance company to find out if they offer gap insurance. Many insurers charge hundreds of dollars less for gap coverage than what your lender does. If your current insurance company does not offer the option for gap insurance, it may be worth shopping for new auto insurance.
What happens after I pay off my financed vehicle?
Once your loan has been paid off, your insurance options open up. You could choose to drop full coverage on your vehicle in favor of a less expensive liability-only policy. If your vehicle retains its value well, you may not want to do this.
On the other hand, if your car’s value is less than the deductible for filing a claim, full coverage may not make sense. If you have questions about how much coverage to buy for a car, it’s best to ask a professional.
SelectQuote Can Help You Find Affordable Full Coverage for Your Financed Car
If you’re looking for affordable full coverage auto insurance for your new vehicle, we can help. At SelectQuote, we quickly and efficiently search a wide variety of highly trusted insurance carriers, finding you the right fit for your needs and budget. We do the shopping for you, saving you time so you can drive your new vehicle with peace of mind knowing you’re protected.
