Do I Need Full Coverage on a Financed Car?

First-time car buyers may think they’re done with the process. Fortunately for you and your car’s protection, but unfortunately for your wallet, you still need auto insurance. If you’re not quite sure the differences between liability and full coverage auto insurance, you may be in for a ride.

But don’t worry, we’ve got you covered. These are the key details you need to know about auto insurance when your vehicle is financed.

Yes, everyone who finances a vehicle must maintain full coverage auto insurance for the life of their loan. The lender still, technically, owns any vehicle that still has a balance left on the loan. Lenders require clients to maintain full coverage auto insurance to protect their investment.

Let’s say a financed vehicle still has $6,000 left on the loan and is totaled in an accident that was that driver’s fault. The driver still has to pay the balance of the loan. That’s where full coverage auto insurance comes into play.

If the driver simply had liability coverage, the auto insurance company wouldn’t pay a penny toward the claim. However, with full coverage, the insurance company would cut the check directly to the lender to pay down the loan.

Once the financed vehicle is paid in full, the driver can then opt to downgrade to liability coverage. However, each driver should evaluate their situation to determine if liability or full coverage is right for them.

You must purchase full coverage auto insurance when you initially finance the vehicle. If you choose to downgrade to liability insurance while you still owe money on the car, you are violating the contract with your lender. That means they’re legally allowed to cancel your auto loan and take the vehicle away from you.

While you can technically downgrade a financed car from full coverage to liability coverage while you still owe money on the vehicle, you should never do this. Even if your lender doesn’t find out and take the vehicle back, you’d still be fully responsible for any damages that occur to the vehicle.

Auto insurance doesn’t go down due to a car being paid off. However, paying off your auto loan gives you the flexibility to reduce from full coverage to liability insurance. Doing this will save you money in premiums, but it will also mean you have less coverage on your vehicle.

Once your car loan is paid off, you’ll need to contact your insurance company to remove your lender as the lienholder of your vehicle. If you need to make a claim, doing this expedites the payment directly to you instead of sending a check to the lender and having them forward it to you.

Getting an auto insurance policy for a financed car (or any vehicle for that matter) is extremely easy and fast with Clovered. Simply fill out our online auto insurance form and one of our many licensed agents will pair you with the perfect policy for your needs.