It is very rare for someone to pay cash for a car. Most people need to obtain financing in order to afford a vehicle. The car dealership will normally recommend their lender to you, but you’re not required to use them. Instead, you can use a bank or private lender to obtain a loan to pay for the vehicle.
When it comes to car insurance, you’re required to have insurance coverage on your vehicle no matter how you paid for it. However, the laws of each state are different regarding how much liability coverage you’re required to have. Just because you financed a vehicle, it doesn’t mean you don’t need to purchase car insurance. The laws of your state must always be followed.
General Requirements of the Lender
The lender of your auto loan will likely set their own terms and conditions regarding how much insurance coverage you need to have. Most lenders require you to purchase a minimum amount of comprehensive coverage, collision coverage, and liability coverage. The purpose of these requirements is to financially protect their interests in case something happens to the car. You are considered to have full coverage when you have collision coverage and comprehensive coverage together on one policy.
State lawmakers only care about the liability coverage on your insurance policy because it concerns other drivers that you may affect. As for full coverage, this is coverage that only applies to your vehicle rather than anyone else’s vehicle. In the event that you get into an auto accident, full coverage is what will pay for repairs or reimburse you for the value of your vehicle if it’s totalled.
Obviously, the lender cares more about full coverage than state regulators because they own the lien on the vehicle. If your car is destroyed, they want to know that your insurance company will pay you enough money so that you can pay off the lien. Without full insurance coverage, they have no guarantee of their lien getting paid in the event of a tragic accident. That would result in the lender losing money, which is something they never want to happen.
Consequences of Not Satisfying the Lender’s Requirements
The lender requires you to retain full insurance coverage on your vehicle throughout the duration of the loan. If you end up changing insurance companies or cancelling your policy while the lien is still outstanding, then it could be considered a breach of contract on your end. Unless you get full coverage on your vehicle before your lender finds out, it could be within their legal authority to have your vehicle repossessed. Once you end up purchasing full insurance coverage again, they’ll release the car back to you.
In most cases, though, the lender will purchase “force-placed insurance” on your behalf. This is where they purchase your insurance coverage and then add the additional cost of the premium onto your monthly loan bill. You don’t want this to happen because forced-placed insurance only covers the vehicle. It does not cover any injuries that you or someone else may incur from an accident.
Remember that the lender only cares about protecting the vehicle. They don’t care about protecting you or anyone else. Therefore, you should take it upon yourself to purchase your own car insurance and make sure you have all the coverage you need for yourself and the vehicle.
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The average auto loan has a 6-year term. If you make your payments on time each month of those 6 years, then your lender will release the lien on the title of the vehicle. At that point, you can do what you want with your insurance coverage. If you want to eliminate your full coverage, then you can go ahead and do so. The only insurance requirements you’ll need to concern yourself with are the ones set forth by your state and local government.