Do You Need Full Coverage On a Financed Car ?

Buy a car; the thrills probably are exciting enough, but finances bring with them a whole new set of responsibilities one of which is a matter of insurance. If you bought your car on a loan, you probably had to buy full coverage insurance. Do you really have to? Can you really just get away with having basic liability? Fine, full coverage might be required, but what does that even mean?

This guide takes you through what full coverage is, why it’s often required if you’re financing a car, and exactly when you might opt for a different policy when you’ve paid off your loan. We’ll cover all the advantages of full coverage, along with a few ideas on how to save on your premium.

1. What Is Full Coverage Insurance? Breaking It Down

Let’s first define what full coverage is. It’s not a single type of insurance but rather a collection of coverages that will offer the person more protection. Full coverage generally entails:

• Liability insurance: This is the part of your policy that can cover for any damages caused by your fault in an accident. That is to say, it basically covers both property and bodily injury so if you are liable, your liability coverage will pay for the medical bills or other car repairs of the other party.
• Collision Coverage: This covers your car’s repair cost to you, regardless of fault. If a collision is by your fault or even an accident with a tree, this coverage ensures that their work will still be done minus the deductible amount if your car needs to be repaired or replaced completely.
• Comprehensive Coverage: This is the “other stuff” insurance—things that happen to your car which aren’t related to a crash. Imagine theft, vandalism, a hailstorm, or hitting an animal. Comprehensive is the peace-of-mind protection for all those worst-case scenarios.
• Uninsured/Underinsured Motorist Coverage: You’d be hit by someone who is uninsured, and the other party was uninsured or had insufficient insurance cover to pay for damages, and this would cover any excess.

In a nutshell, full coverage puts a total safety net on events involving your car and other peoples’ property or injury in various events.

2. Why do lenders require comprehensive coverage on financed vehicles?

If you financed your car, you’ll want to be aware that until you pay off the loan, the lender has a vested interest in your vehicle. Technically, it’s their collateral. If something were to go wrong with the car, the lender would want to know they’ll see their money back. The lender can get their money this way—perhaps getting less, through an upside-down sales price, or if the vehicle is totaled or otherwise damaged.

That’s another reason many lenders require a car owner to have full coverage, which means collision and comprehensive insurance. This covers not only the driver but also the lender in case of accidents that put the car out of commission, making it a total loss, or if it gets stolen. Otherwise, one risks owing on a loan with nothing to show for it in case something happened to the vehicle.

This means that full coverage is not only a way to cover yourself, but it also covers the financial interest of the lender. And the proof of the pudding is to check your loan agreement. By practice, the lender will point out what type of coverage they expect you to have.

3. Why Full Coverage Insurance Matter for You and Your Vehicle

Full coverage would qualify as one of the requirements for loan or finance companies, but, in reality, it really covers and protects the individual in a vast majority of scenarios. Here are some of the main reasons why full coverage insurance is a good call:

• Collision Coverage in case of Accidents: You get full coverage irrespective of who caused it. And if you only have liability insurance, nothing will be paid for any repairs on your part even if you didn’t cause it. Collision insurance is here to make sure you are not left with a pocket full of money to pay for a repair that may cost thousands.
• Damage from Non-Collision Incidents: Full coverage insures against incidents like theft, vandalism, falling trees, or hailstorms. These are the kinds of situations in which one usually doesn’t know what to prepare for, and full coverage will have it repaired or replaced.
• In the unlikely event that your car is totally destroyed—whether by accident, theft, or some other disaster—comprehensive and collision will allow you to recover the car’s value. If you still owe money on the loan, the insurer will pay that directly to your lender to satisfy the balance, and any balance remaining (which would be if the car was worth more than you owed) would come to you.
• Peace of Mind: Car accidents can traumatize enough without the added stress of how to find money to repair or how to get one’s car replaced. With full coverage, one may leave with a solution for recovery rather than trying to figure out monetary expenses.

Full coverage insurance provides an escape from potential financial losses that would be initiated simply because of unforeseen incidents. In simple words, it is the means of security where nothing goes amiss during a disaster.

4. What if you only carry liability insurance on a financed vehicle?

Shopping for full coverage insurance goes out the window when you finance a vehicle. Dropping full coverage insurance when you finance a vehicle will put you into a couple of big messes. If you don’t carry the coverage your lender requires, they can take action. Here’s what can happen:

• Loan Default: If you fail to secure full coverage insurance, your lender may call your loan into default. This is serious because it involves penalty charges, additional fees, and ultimately repossession. That which the lender is actually concerned about is simply safeguarding their investment, and without insurance, they may be willing to take actions that ensure their financial stake is guarded.
• Out-of-Pocket Expenses for Damages: If your car gets into an accident or otherwise becomes damaged in a non-collision incident, you will pay the costs of damages or replacement yourself because such a coverage isn’t part of collision or comprehensive. If you can’t afford paying those costs you risk getting into a tight financial spot—still owing on a car that’s unusable.

The coverage makes sure that in case your car is stolen or your car is destroyed in the wake of some natural disaster, you are not burdened by the whole cost of replacing the vehicle. You may even not afford a new car if it gets destroyed without comprehensive coverage and may even be worth a fortune.

In other words, you could be throwing money out the window in your pocket if you don’t carry full coverage – especially when you still have a loan on the car.

5. When Would You Consider Dropping Full Coverage?

Luckier for you, you can switch over to another kind of insurance policy once your loan is paid off. These are when you might drop your coverage:

• Once You’ve Paid Off Your Car Loan: When you have paid off your car loan—if at last, the lender no longer has a financial interest in your car and can alter coverage to fit your requirements. However, you will soon find that even though you are probably going to be able to drop collision or comprehensive insurance, you are going to want to consider the value of your car before you do anything.
• When the Car’s Value Is Too Low: If your car is very old or has dipped to a too low level, then you should not think of getting it full covered. You can get an estimate of what your current car’s value is by applying the Kelley Blue Book and comparing that with what the premium is being charged on a full coverage. If the value of your car has come down too low, then you just need liability insurance.
• If You Can Afford to Replace Your Car: Assuming you have enough savings to replace your car should it get smashed up or stolen, you probably will yawn at the prospect of having to come out of pocket for an additional layer of collision and comprehensive coverage. However, if you really need to get to work or otherwise be able to get to daily activities that you must attend to each day, you’ll probably want to keep at least the comprehensive coverage.

Ultimately, your decision to reduce coverage should depend on the current value of the car and your personal financial situation. Be sure to consider the potential risks before making a change.

6. Tips for Finding Affordable Full Coverage Insurance

Full coverage insurance can be pretty expensive, but you’ll be all right if you have to pump out a little extra cash for it. Here are some tips on saving money so that you can have a less pricey policy without sacrificing protection:

• Start shopping around, and get quotes from different companies. Don’t take the first quote you hear. Rates can vary so much from one company to another.
• Reduce Your Deductible: Monthly premiums will also decrease. Make sure you will be able to pay the out-of-pocket cost if you file a claim.
• Discounts: Auto insurers usually will agree to lower the price of your insurance for purchasing bundling of home and auto, an excellent driving record, and even safety features, like anti-theft systems inside of your car. Be sure to ask what discounts are available to you.
• Check Your Limit Coverage: You don’t necessarily have to take the maximum coverage limit. Think about your car’s value and your pocket as you try to decide what level of coverage you should take.
• Make Sure You Maintain Good Credit Score: The better your credit score, the lesser your chances of paying a lot more than necessary for a car insurance premium will be.

This way, with simple tips, you may easily come to full coverage that will protect you and your car without blowing your budget.

Often car finance requires full-coverage insurance. That’s because you are protected in the case of theft or accident. The insurance covers you as the buyer, and now it covers the lender, because their financial interest in the car is insured, too. Probably, though, full-coverage insurance will cost you more dollars. There are ways, though, to get lower premiums without sacrificing protection.

Whether you opt for coverage for the whole life of the loan or, after repaying your loan, opt for a different policy, make sure it reflects what you need and what you can afford. Or in short words: finding the right balance between protection and affordability so you can keep on driving with confidence.

Also Read: How to Create an Actually Functional Sustainable Budget ?