If you’ve ever purchased a brand-new car directly from a dealer you may be familiar with what’s known as a car insurance lien holder. This is especially true if you financed the car through a bank or other financial institution.
If you’re not familiar with the term, read on to learn all you need to know about the subject.
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When you purchase a new or used car through a financing arrangement, it’s important to look not only at the bottom-line price, but also some of the hidden costs involved.
One of those hidden costs could be in the type of insurance the financing company requires you to carry. The higher cost of comprehensive insurance may price you out of the vehicle you really want and into a less desirable one.
Why does a financing company file a car insurance lien?
Banks and other financial institutions file liens on financed cars in order to protect their investment. These liens cover not only the vehicle title, but also the insurance carried by the car buyer.
In simplest terms, when you finance the purchase of a car you don’t really own that vehicle until it’s completely paid for.
Prior to that, the financing company owns the car. The lien is placed on the title and insurance policy so that if the car suffers a total loss the financing company can recover its money.
With this knowledge, it’s easy to understand why a lien is placed on the title. But the insurance lien is a bit more complicated. This type of lien is filed as a means of forcing car buyers to purchase comprehensive insurance at a level great enough to protect the bank’s investment.
Car buyers will usually find written somewhere in the agreement that a failure to provide such insurance will enable the financing company to force a policy of its own choosing, from an insurance company of its own choosing, on the car buyer.
What’s the difference between carrying my own insurance and the bank’s forced insurance?
It’s not uncommon for car buyers to run into financial trouble and cease making insurance payments. In some cases, the rationale is that the bank will trigger its forced insurance option and cover the cost anyway.
What many don’t realize is that the car buyer is still responsible to make the premiums. What’s more, those premiums tend to be extremely high which puts financially troubled car buyers in a worse position.
Before buying a new or used car through a financing arrangement, it’s important for buyers to assess their financial situation. They need to know if they can afford both the monthly car payments and monthly payments.
Failing to provide insurance will trigger the car insurance lien filed by the financing company, thereby causing major headaches you don’t need. If you can’t afford the cost of comprehensive insurance, you might need to consider other options.
What are the other options available to avoid a car insurance lien?
By far the best option is to pay cash for any car you purchase.
While it may be uncomfortable and inconvenient to have to save the money ahead of time, paying cash not only eliminates the possibility of a car insurance lien, it also eliminates the interest payments you would make if you financed the car purchase.
One of the best ways to employ this option is to begin putting away money well before the time you’ll need to purchase a new car.
There is a second option, though it’s not recommended unless you have demonstrated strict financial discipline in the past. This option involves using a credit card for a car purchase, thereby eliminating the financing company as the middleman.
When using a credit card to purchase a car, if you can fully pay off the balance in six months or less the interest payments usually add up to less than the combined interest payments and insurance costs of going the route of a traditional loan.
Again, be very cautious in using this option. If you extend payments beyond the six-month period, you could end up paying significantly more.
Regardless of whether or not you have a car insurance lien attached to your new car purchase, it’s always wise to carefully consider your investment and whether or not you truly need comprehensive or full coverage.
On an inexpensive used car, it may not be worth the cost. But for a fairly new vehicle in which you’ve invested a significant amount of money, you want to protect that car against total loss. You don’t want to lose your investment anymore than the bank wants to lose theirs.
Even with a car insurance lien, you have the right to search for the best insurance rates in your area. Get started comparing car insurance quotes now by entering your ZIP code!