Can You Get Liability Insurance on a Financed Car?

Financing a car comes with responsibilities and one of the biggest is getting the right kind of insurance coverage. A common question that might cross your mind while looking to insure your financed or leased vehicle is, “Can you get liability insurance on a financed car?”

Though liability coverage meets state requirements, it’s rarely enough for a financed vehicle. Lenders usually require full coverage insurance, including comprehensive and collision insurance, to protect their investment. However, carrying only liability insurance means a breach of agreement with your lender. If this happens, your creditor could get forced-placed insurance for which you have to pay the bill.

Keep reading to learn the answer in detail. You will also find important information about why you need full coverage and what happens if you only have liability insurance on a financed car. Let’s start with the basics!

What Does Leasing or Financing a Car Mean?

Financing or leasing a car means choosing how you will pay for it.

When you finance a car, you take out a loan to buy it. You make monthly payments until you own the car. Once you finish paying, the car is yours. The lender, known as the lienholder, owns your car's financial interest until you fully pay it off.

Leasing a car is different. Instead of buying it, you rent it for a set period, usually two to three years. You make monthly payments during the lease. At the end of the lease, you return the car or may have the option to buy it.

Can You Get Liability Insurance on a Financed Car?

When you finance a car, the lender holds a financial interest in the vehicle until you pay off the loan. Because of this, you can’t simply rely on liability insurance alone. While liability coverage pays for damages or injuries you cause to others in an accident, it does not cover damages to your car. This puts both you and the lender at risk, which is why most lenders require full coverage insurance.

If you choose to carry only liability insurance on a financed car, you’re violating the terms of your loan agreement. The lender expects the car to be properly insured to safeguard its investment. However, if you drop full coverage, and just maintain the liability-only coverage, you’ll face serious consequences. So, let’s learn what will happen if you just maintain minimum liability insurance on your financed vehicle.

Consequences of Just Carrying Liability Insurance on a Financed Car

Opting for liability insurance alone can cause significant financial problems. Here’s what could happen if you don’t maintain full coverage:

• Breach of Loan Agreement: Liability-only coverage violates the lender’s insurance requirements which means you’re breaking the loan contract.
• Force-Placed Insurance: If the lender notices a lapse in coverage, they may purchase insurance on your behalf, called force-placed insurance. This is mostly far more expensive than a standard auto insurance policy and adds to your monthly payments.
• Financial Risks: If your car is damaged or totaled, you’ll have to pay for repairs or the remaining loan balance out of pocket.
• Potential Repossession: Continued non-compliance with the insurance requirements may result in the lender repossessing the vehicle.
• Higher Long-Term Costs: Force-placed insurance, repair costs, or loan penalties can all increase your financial burden.

In Short: Key Consequences

• Violation of the loan agreement.
• Lender adds expensive force-placed insurance.
• You pay out of pocket for damages.
• Risk of vehicle repossession.
• Increased financial strain over time.

To keep yourself and your car safe, get affordable full coverage auto insurance for a financed car. This can save you money over time and help you feel secure in case of any financial emergencies.

What Are the Minimum Insurance Coverage Requirements for a Financed Car?

When you finance a car, the lender requires more than just liability insurance to protect their financial interests in the vehicle. Since the car serves as collateral for the loan, the lienholder wants you to maintain minimum car insurance coverage. Minimum requirements for financed cars usually include liability, comprehensive, and collision insurance. However, lenders might also recommend a few add-on insurance policies!

Depending on your leasing company or lender, they may require the following auto insurance coverage:

• Liability Coverage: This is required by law in most states and covers damages or injuries you cause to others in an accident. It has two components: Bodily Injury (BI), and Property Damage (PD). In some states (e.g., Michigan), you might need PIP (Personal Injury Protection) instead of liability insurance.
• Collision Coverage: Pays for repairs to your vehicle if it’s damaged in an accident, regardless of who is at fault. Whether you crash into another car, a tree, a lamppost, or a wall, this policy will cover you.
• Comprehensive Car Insurance: Covers damages caused by events other than collisions, such as theft, vandalism, hail, flood, or fire.
• Gap Insurance (Optional but commonly recommended for new cars): Covers the difference between the car’s actual cash value and the remaining loan balance if the car is totaled. This coverage is quite helpful because cars depreciate too fast. Learn more about gap insurance.
• Uninsured or Underinsured Motorist Coverage (Optional but often recommended): It covers injuries and damages in case you are hit by an uninsured motorist (UM), or underinsured motorist (UIM). Also, uninsured motorist property damage (UMPD) pays for repairs to your vehicle if it’s damaged by an uninsured or underinsured driver.

Do I Need Full Coverage Insurance on a Financed Car?

When you finance a car, having full coverage insurance is usually required.

Full coverage car insurance includes the following:

• Liability Insurance (e.g., Property Damage Liability and Bodily Injury Liability)
• Comprehensive Insurance
• Collision Insurance

Lenders and car dealerships require this level of insurance to make sure the vehicle is protected throughout the life of the loan.

Without full coverage insurance, if the car is damaged or totaled, you might be left with a substantial financial burden. Furthermore, lenders want to be assured that their investment is secure, as they are financially tied to the vehicle until the loan is fully paid off.

Learn more about it. Read our article on do you need full coverage on a financed car.  

Does Car Dealership Require Full Coverage Insurance?

Yes, car dealerships generally require you to have full coverage insurance before completing the sale of a financed car. This requirement ensures that the car is properly insured from the moment you drive it off the lot.

Since the dealership wants to protect the vehicle against potential damage or total loss, they commonly won’t proceed with the sale until proof of full coverage insurance is shown.

Even if you plan to purchase a new car or a used car, the dealership needs to verify that you have insurance in place to avoid any legal or financial issues that may arise during the financing process.

Why Do Lenders Require Full Coverage Insurance on a Financed Car?

Lienholders require full coverage car insurance on a financed vehicle primarily because they have a financial stake in it until the loan is fully paid. So, simply, they want to protect their investment since there are significant risks out there on the road, such as accidents, theft, or natural disasters, that can cause damage to the vehicle.

Without full coverage, the lender could potentially lose their investment if the car is stolen or totaled. Carrying full coverage insurance for a financed or leased car ensures the lender is compensated for the vehicle’s worth if it is damaged.

Here are the key reasons why lenders require full coverage insurance:

• Protects their financial interest
• Covers damage to the vehicles (e.g., repair or replacement costs)
• Minimizes risk of loan default (e.g., through gap insurance policy)
• Complies with loan agreements requiring full coverage until loan settlement
• Avoid financial losses in case something happens to the car

Does Financing a Car Affect Insurance Costs?

Yes, financing a car can affect your insurance costs. Although financing itself doesn’t automatically make insurance more expensive, it does require you to carry full coverage insurance, which is generally pricier than liability-only coverage.

Also, lenders require comprehensive and collision coverage, which means your insurance premiums will likely be higher than if you were to buy a car outright. Since the lender is financially invested in the car, the required coverage ensures that both their financial interest and your vehicle are protected in case of damage or theft. This also leads to higher car insurance premiums compared to cars that are owned outright with less stringent coverage requirements.

Other Factors That Influence Insurance Premiums for Financed Cars 

Apart from the car insurance requirements by the lenders, there are other important factors that can influence insurance premiums for a financed car:

• Car’s Make and Model: Newer, more expensive vehicles cost more to insure due to higher repair or replacement costs.
• Coverage Requirements: Since lenders want you to carry full coverage, the inclusion of collision and comprehensive coverage raises the car insurance premiums.
• Driving History: If you have good driving records, and no history of accidents, tickets, or DUI, you’ll get a lower auto insurance quote. However, if your driving history shows the opposite, you are more likely to face higher car insurance premiums for your financed car.
• Location: Where you live also affects premiums. Areas with higher crime rates, accident frequencies, and state law may lead to higher costs.
• Deductible Amount: The higher the deductible, the lower the monthly premiums.
• Credit Score: Insurers use your credit score to determine rates. A higher score means you’ll get to pay lower premiums.

To sum up, financing a car typically results in higher insurance premiums due to the full coverage required to protect both you and the lender’s investment.

Can You Remove Insurance Coverage After Paying Off Your Car?

Once you’ve paid off your car, you can reduce or remove certain insurance coverage. The lender’s insurance requirements are no longer in effect once the loan is fully paid off. You’re free to adjust your coverage, such as dropping comprehensive or collision insurance, especially if your car is older or no longer has a high value.

However, while you have more flexibility, consider your financial situation and risk tolerance before making changes. If your car is totaled or damaged, liability insurance may not cover the costs and leave you responsible for repairs or necessary replacement.

What Happens If a Financed Car Is Damaged or Totaled?

If your financed car is totaled or damaged, the outcome depends on what policy you’re carrying. In case you just have liability insurance, it won’t cover damages to your own car. However, if you have full coverage insurance, the insurance company will pay for the repairs or, in the case of a total loss, provide a payout.

However, if the car is deemed a total loss, you have to have gap insurance to get the outstanding loan payout! Here’s how gap insurance helps in a total loss situation:

• Pay the difference between your car’s loan balance and its actual cash value.
• Make sure you don’t pay out of pocket to settle the remaining loan.
• It helps you avoid financial strain from unexpected losses.
• Complements comprehensive and collision insurance for total protection.

How to Choose the Right Insurance Policy for Your Financed Car?

In 2024, over 80 percent of new cars were financed, according to Statista. This statistic explains why many drivers are inquisitive about insurance for financed vehicles. Given its relevance to both the car and insurance industries, it's understandable that people may feel confused when trying to choose the right type of insurance policy from a reliable insurer.

To satisfy your lender while managing costs and coverage, follow these key steps:

1. Understand Lender Requirements: Start by reviewing your loan agreement. Most lenders require full coverage insurance, which includes liability, collision, and comprehensive coverage. Comprehending these requirements will help you avoid penalties like force-placed insurance.
2. Evaluate Your Coverage Needs: Assess the value of your car and your financial risk. Comprehensive and collision coverage is mandatory, but you can add options like uninsured/underinsured motorist coverage and gap insurance for extra protection.
3. Compare Insurance Providers: Get quotes from multiple companies to find affordable options. Look for an affordable insurance agency that offers competitive rates, strong customer support, and flexible payment options.
4. Look for Customizable Policies: Some insurers allow you to adjust your deductible and coverage limits. Choosing a higher deductible can lower your insurance costs while still meeting lender requirements.
5. Work with an Insurance Expert: To simplify the process, work with a trusted professional. Find an expert insurance agent who understands the nuances of financed car insurance and can recommend the best policy for your needs.

If you have questions, don’t hesitate to reach out. Use our Contact Us Form to connect with experienced agents who can guide you through every step.

Tips to Lower Your Insurance Premiums on a Financed Car

Full coverage insurance for financed cars can be costly. But there are several ways to reduce your insurance premiums without compromising coverage:

• Increase Your Deductible: Raising your deductible can lower your monthly premium.
• Bundle Policies: Combine your auto insurance with home or renters' insurance to qualify for multi-policy discounts.
• Ask About Discounts: Many insurers offer discounts for safe driving, low mileage, or cars with anti-theft devices.
• Choose the Right Vehicle: Cars with strong safety ratings and lower repair costs generally have lower insurance premiums.
• Shop Around: Compare quotes from multiple providers to ensure you’re getting the best deal. Look for an affordable insurance agency like L.A. Insurance that can help you find the right policy at a lower price.

Can I Just Get Liability Insurance on a Financed Car: The Bottom Line

Getting Liability Insurance alone on a financed car isn’t enough to meet most lender’s insurance requirements. They typically require full coverage insurance, including comprehensive and collision coverage, to protect their investment. Dropping full coverage can lead to penalties like forced-placed insurance or financial risks if the car is heavily damaged or totaled. To stay compliant and protect your finances, choose the right policy, particularly one that is required by your lender or financial institution. We recommend comparing providers and exploring ways to lower your insurance premiums.

Frequently Asked Questions (FAQs)

Is Insurance More Expensive for a Financed Car?

Yes, insuring a financed car is typically more expensive. Lenders usually require full coverage which includes comprehensive and collision insurance, so that they can protect their investment. This leads you to higher premiums compared to insuring a fully owned vehicle.

How Does Comprehensive and Collision Coverage Protect a Financed Vehicle?

Comprehensive coverage protects your financed car against non-collision incidents like theft, vandalism, or natural disasters. Collision coverage pays for repairs if your vehicle is damaged in an accident, regardless of fault. Together, they ensure both you and your lender are financially protected.

What Happens If You Don't Have Full Coverage on a Financed Car?

Failing to maintain full coverage insurance on a financed car breaches your loan agreement. The lender may impose force-placed insurance, which is expensive and protects only their financial interest. You could also face risks like vehicle repossession or paying out of pocket for damages or total loss.

How Does Force-Placed Insurance Work?

When you drop full coverage insurance on a financed car, the lender may purchase force-placed insurance to protect their financial interest. This policy is expensive, covers only the lender’s investment, offers no protection for your vehicle or personal liability, and eventually increases your financial burden.

What Should I Do If I Can’t Afford Insurance on a Financed Car?

If you’re struggling to afford insurance on your financed car, consider raising your deductible, seeking discounts, or comparing quotes from different insurers to find a more affordable policy. Maintaining the required coverage is necessary to comply with your loan agreement.

Can You Remove Insurance on a Financed Car?

No, removing insurance from a financed car violates your loan agreement. Lenders require continuous coverage to protect their investments. If you cancel your policy, your insurer might notify the lender, and they may charge fines/penalties, like force-placed insurance, and in the worst-case scenario, they might take possession of your vehicle.

What Factors Influence Financed Cars Insurance Requirements?

Financed car insurance requirements can be affected by several factors. Loan terms and conditions often mandate full coverage insurance. The car’s value and condition also influence the required coverage, especially for high-value vehicles. Also, your financial situation, like credit score and income, impacts policy options.

(loan Terms and Conditions, Vehicle Value and Condition, Personal Financial Situation)