Does having a lien on your car alter your rates for car insurance?

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Joel Ohman
Founder, CFP®

UPDATED: May 7, 2018

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Here's what you need to know...

  • Lienholders require full coverage auto insurance to protect their interest in your vehicle
  • Many factors go into the determination of your rates for insurance
  • If you do not purchase the bank-required car insurance coverages, they can purchase insurance for you, and you will pay the additional costs

If you have a lien on your vehicle, it will affect car insurance costs.

Lienholders have a stake in your car if they are financing the vehicle. They want to protect their investment, even if you do not. The lienholder is likely to require you to carry full coverage car insurance on the vehicle for protection.

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The definition of full coverage insurance may be something different depending on whom you ask and where they live.

Since car insurance laws differ by state, coverage details are different. Even insurance carriers have to be licensed in the states they serve, so they are regulated and held accountable to the laws of each state.

What type of insurance do lienholders require?


When consumers go to buy a car and use a finance company to pay the seller, a binding contract is formed.

Not only do these consumers have to pay back these loans with interest, but they also promise to purchase enough insurance to pay the financier in case the vehicle is significantly damaged or completely totaled.

In order to do this, collision and comprehensive auto coverage must be secured.

Most auto loan finance companies do not allow their customers to buy liability-only coverage. Not only would this put the person responsible for paying the auto loan at a financial risk, but it could cause the vehicle itself to become a liability.

Liability car insurance coverage does not pay out for car repairs on the vehicle that is covered.

In the event that the car is repossessed, the lienholder would suffer a financial loss because the vehicle would no longer be as valuable because of the damages.

J.D. Power & Associates lists the highest rated car insurance companies in the U.S. that issue the largest number of policies.

You might find auto insurance providers with lower rates that are not listed by J.D. Power, but it is in your best interest to find out more about their reputation before purchasing a policy.

There are some car insurance companies that unjustly make it difficult for consumers to have their claims approved.

Does a lienholder determine car insurance rates?

Woman with glasses reading at desk;

Your lienholder does not determine your car insurance rate. Your individual or family situation determines your insurance rate. The lienholder makes your loan conditional.

That condition is that you maintain full coverage to protect the investment in the event of an accident. To fulfill the condition, you will have to pay more for what is considered full coverage in your state.

In most states, the addition of collision and comprehensive coverage constitutes full coverage.

Collision covers the vehicle in the event of an accident involving another car or object. Collision covers your vehicle if it rolls over as well. Collision and comprehensive coverage are grouped together in most policies with a $100 to $250 deductible.

Can a lienholder require a certain amount of car insurance?

A lienholder will not usually require a certain amount of car insurance coverage. This is established between you and your insurance agent. There are set amounts based on state minimums.

You have the option of choosing how much coverage you pay for as long as it is enough for replacement costs or actual cash value of your car.

If you have an antique car or specialty vehicle that is financed by a lender, they want to be assured your car is covered with enough collision and comprehensive to cover the cost of repair or replacement.

You may have to have your car appraised to determine the value. If you own a specialty car this amount was probably determined when the lender loaned you the money for the renovations or for whatever reason they loaned you the money.

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What other factors affect car insurance costs?

Your lien is not the only factor that affects your car insurance rates. Other factors include such things as:

The make and model of your car is an important factor in determining rates. For example, sports cars cost more to insure than minivans.

Insurers figure the likelihood that a sports car driver is going to take more risks than a soccer mom driving a minivan is very high.

Presumably, a 32-year-old male is going to have more experience and take fewer risks than a 25-year-old.

Your zip code describes the potential for an accident, vandalism or theft. Your credit rating and driving record tell the agent a lot about you as a person and your driving practices.

What happens to car insurance once a lienholder receives the last payment?


Once you have paid your last installment on your loan, you can make changes to your policy. These changes may not be effective immediately depending on where you stand on your current policy.

If you have made advance premium payments, you may have to wait for a new payment cycle for the change to become effective.

By the time you have completed your lien payment installments, your car may be less valuable than it was when you initiated your policy. As your car ages, you have no need for the maximum amount of comprehensive coverage.

That is good news to a person who has struggled with expensive premiums. However, if you can afford to keep the coverage, it may be wise to do so.

Is the lienholder notified if I drop my collision and comprehensive car insurance?

Some people may be thinking, “Hey, I could purchase collision and comprehensive coverage to satisfy the condition, and drop it with my policy renewal.”

This may be possible for a short while, but once your lender receives notification from DMV that you are only carrying liability, they may have the right to accelerate your loan or repossess your vehicle.

Can lienholders take out a car insurance policy on your vehicle?


In the event that you fail to buy a sufficient amount of car insurance, lienholders can and often do take out their own car insurance policies.

Not only will you be responsible for paying back the premiums on these policies, but you might also be subject to additional interest charges.

Your car loan payments would probably not go up if you did not buy the required amount of insurance, but the length of your loan would likely be extended.

If you do not make payments to your auto loan finance company for the additional car insurance policy taken out, your vehicle could be repossessed and your credit would be heavily damaged.

In some cases, lienholders will take out their own car insurance policies simply to protect their financial interests.

These types of auto policies do not require repayment, but you would also not receive any payment if an insurance claim was filed. Lienholders also financially benefit first when a car is sold.

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