What to Do If You Have an Insurance Lapse on a Financed Car

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  • What to Do If You Have an Insurance Lapse on a Financed Car

For your car insurance policy to stay active, you need to make your payments. You can pay car insurance premiums monthly, bi-monthly, quarterly, or yearly. Some insurers even offer autopay discounts or discounts for paying in full.

If there’s some issue that causes you to miss your payment, here’s what happens when your insurance lapses on a financed car and what you can do to fix the situation.

What Happens if Your Car Insurance Lapses on Your Financed Car?

Allowing your auto insurance to lapse when you’ve financed your car likely breaches the contact you’ve made with your lender, and they then have the right to force place insurance on you or even repossess your vehicle. You’re also immediately at financial risk – you’d have to pay out of pocket for any accident or damage you cause to yourself or others if you continue driving without insurance, which is illegal in almost every state.

If you’ve financed your car, you’ve got full coverage. Full coverage auto insurance covers damage you can cause to yourself and your own vehicle. It isn’t a specific type of policy but rather a combination of coverages that typically includes collision and comprehensive coverage.

Lenders require full coverage if you’re financing or leasing your car. It protects their investment in your vehicle. If you total your car, your lender has a way to recoup the loan’s value through the full coverage policy.

When you finance your car, you sign a contract with the lender that establishes your car payments. This contract also typically requires you to maintain auto coverage on your car for the life of the loan. If you don’t, your lender can take action:

Force-placed Insurance

Your lender can force place insurance on you if you fail to maintain your own coverage. This means your lender will get insurance for you, but they’re not helping you out. Force-placed insurance is often very expensive, and it doesn’t offer good value. 

They will charge you higher rates for a full coverage policy than you can find on your own. And, force-placed insurance may include the minimum amount of liability insurance your state requires, if it has any at all. So, you’ll be paying higher premiums for worse protection, and you still may need to get liability coverage on your own if it’s not included before you can drive.

Force-placed insurance puts your lender’s interests first, so you want to get rid of it as soon as possible for a policy you get that puts you first. If you receive force-placed insurance after letting your original insurance on your financed car lapse, start shopping for a plan immediately. When you find the right one, send your lender your new proof of insurance. They will then remove your force-placed coverage.

Vehicle Repossession

If you don’t pay your force-placed insurance premiums and don’t find your own coverage, your lender can begin the process of repossessing your vehicle. As we mentioned, driving without insurance is illegal in every state except Virginia and New Hampshire. As a result, auto insurance carriers and state motor vehicle departments communicate regularly. 

If your vehicle is registered with your state, which it should be to drive legally, then the DMV expects you to have car insurance. If either the DMV or the insurance company sees your policy has lapsed, they may contact your insurer. If you don’t get car insurance again, they may want to repossess your car, especially if you’re found driving it and you get a ticket or get into an accident.

You may also accumulate fees for allowing your insurance to lapse with your state’s DMV. Some states require registered vehicles to be insured at all times. A lapse in auto insurance coverage could mean you’re violating state law, and you’ll have to contact the DMV to settle. These fees can range from a few dozen dollars to a few hundred dollars.

Some DMVs will also want to suspend or revoke your license if they find that you don’t have insurance on your car. Repossession and license suspension are often drastic measures, and they won’t happen immediately after your insurance lapses. Don’t wait long. Again, you should get your own car insurance as quickly as possible.

When Your Car Insurance Lapses After Your Grace Period 

None of the actions your insurer or the DMV can take should come as a surprise if you’ve let your car insurance policy lapse because your insurance company must communicate with you before canceling your policy. You’ve also got a grace period before your policy officially lapses.

Car insurance grace periods vary by company and by state. A grace period is a length of time after your payment is due but before your policy officially lapses and you’re without coverage. Car insurance grace periods can last anywhere from one day to a couple of weeks.

If you’ve missed your payment date, call your insurance company immediately. You’ll likely be able to make a payment during the grace period (plus a probable late fee) and get your policy reinstated. 

If you don’t pay and your car insurance lapses after your grace period, expect some communication from your provider. You’ll receive a cancellation notice in the mail or email before your policy is gone. This letter must come a certain number of days before your policy is officially canceled to give you a heads up in most states. The time varies, but it should be at least ten days prior.

If you want to cancel your policy because you’ll no longer be driving, like if you’re leaving the country for a while, don’t let your policy lapse. Instead, call your company and tell them you want to cancel. Letting your policy lapse is not the same thing as not renewing it.

What You Should Do When Your Car Insurance Lapses

When your car insurance lapses, you should understand why your coverage lapsed. You should then try to get your old policy reinstated. If you can’t, you should start shopping for new car insurance immediately.

If your policy has lapsed from some error on your provider’s part, clear this up immediately. More often than not, though, you either missed a payment knowingly or unknowingly. You should monitor communications with your provider and reach out as soon as you see a notification from them indicating a lapse in coverage. You can get likely get your policy reinstated if you pay during your grace period, too.

If your car insurance lapses, you should stop driving your car. Getting caught driving without insurance can be a costly fine. It can also cause the DMV to suspend your license or possibly repossess your car. And, it’s a big red flag to insurers. You may get classified as a high-risk driver, and you’ll have to pay much higher premiums when you go to buy auto insurance again.

How to Avoid A Car Insurance Lapse

To avoid a car insurance lapse, know when your policy expires, your grace period, and be wary of when your credit cards expire so your automatic payments never get disrupted.

Automatic payments can be helpful – until they aren’t. Setting and forgetting your credit card with your auto insurance company is good, especially if you receive a discount for doing so, but just be sure to keep on top of your mail and email with your insurance company when you do this. You don’t want to miss out on anything regarding your premiums and payment statuses.

Also, be aware of your policy’s effective date. Knowing when your plan begins and ends is important, especially if you don’t plan on renewing. If you get a new car insurance plan, make sure it’s active before your current one ends.

How to Find the Cheapest Auto Insurance for a Lapse in Coverage

If you’ve got a financed car, you’ll need to find a full coverage policy to satisfy your lender’s requirements. Unfortunately, after a lapse in coverage, your rates can increase over 10-15%, and it can be much more depending on how long you’ve been without coverage.

If you’re looking for auto insurance after a lapse in coverage, we can help. Clovered partners with several of the top car insurers in the nation. All you need to do is submit our simple auto insurance quote form and indicate at the bottom that you’ve had a lapse in coverage. One of our agents will get in touch with you as soon as possible with your options. It couldn’t be easier.

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The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.