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UPDATED: Dec 11, 2019
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State laws dictate the minimum amount of car insurance for liability that you must carry on your vehicle and the remaining insurance coverage that is available is usually optional.
If you have an auto loan, though, you are typically required to carry additional insurance by your creditor. The insurance you are required to have if you have an auto loan will be for:
- liability coverage
- comprehensive coverage
- collision coverage
While you will be instructed by the state and your lender as to how much coverage to purchase, the deductible will be your choice, which can help keep your premium lower.
Once your car is paid in full, it will be at your discretion to continue the collision and comprehensive car insurance coverage or to cancel it and maintain only liability. Most often, the age and condition of your vehicle will dictate your decision.
To learn how much auto insurance coverage your lender will typically require of you and what type of auto insurance coverage most lenders will require you to have then read on further.
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Liability Car Insurance for an Auto Loan
Liability insurance is required by all states, although the minimum amounts of coverage mandated vary from state to state. Liability coverage offers you financial protection in the event you are at fault in an accident.
It pays for the bodily injury, death, and/or property damage that is suffered by the victim(s) of the opposing car.
Liability coverage is also extended to victims who are pedestrians at the time of the accident.
For example, if you run your car into someone waiting at a bus stop, you are liable for the damages caused to that person and your liability insurance will cover the expenses up to the amount of coverage purchased.
Three numbers are used to convey liability coverage amounts, such as 20/40/30. This indicates the maximum amount of car insurance purchased for liability incidents. The numbers are in the thousands so the 20 above stands for $20,000 in coverage.
- The first number – This represents costs of bodily injury or death for a single victim
- The second number – This represents the total bodily injury or death compensation for multiple victims combined
- The third number – This number represents property damage for all victims involved.
Usually, the property damage compensation is used to pay for the damages incurred to the victim’s car, but it can also include other property such as a bicycle if you hit a cyclist or a fence or house if you damage those.
Liability does not offer you any compensation for your own bodily injury or property damage that may occur in an accident for which you are at fault.
In order to receive medical coverage for your own injuries, you need to purchase optional medical insurance from your car insurance agent or be covered by private or group health insurance.
Collision car insurance will reimburse you for damages to your vehicle, and this is required by all lenders who finance your car since they are the title holder of your car until the loan is paid in full.
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Collision Car Insurance for an Auto Loan
Collision car insurance is optional for many car owners, but if you have an auto loan you are most likely required to carry this policy type for your car.
This is because, if you are at fault for an accident and your car is damaged, you need to be able to prove financial responsibility to pay for necessary repairs to the car or to cover a total loss if one is declared.
GAP insurance can be purchased, optionally, to help cover the financial loss between a total loss claim and the amount owed on your depreciating car.
If you are struck by an uninsured motorist or underinsured motorist and you do not have uninsured or underinsured motorist insurance, collision insurance may be able to help cover some of the costs associated with the damages to your car.
Provided you have collision insurance, your car will be covered regardless of who is at fault for the accident. Collision coverage will provide you with financial protection for damages to your car incurred through an incident with another car, an object, road surface, or even a person.
Lenders require collision insurance for the duration of auto loans so that the cost of your car’s damages can be covered to the extent of the amount of coverage you purchased.
However, since collision only addresses damage to your car from collisions, lenders also require comprehensive insurance.
Comprehensive Car Insurance for an Auto Loan
Comprehensive car insurance is the “everything else” insurance that addresses damages to your vehicle that are not covered by collision insurance.
Comprehensive insurance will cover the costs of repairs to your car based on how much insurance you bought, whether your car is damaged by:
Car insurance for comprehensive coverage can be purchased separately or bundled in a package. If you have an auto loan, you will most likely purchase it as a package deal.
If you are not required to carry both collision and comprehensive then you can just buy the insurance you need. However, depending on the age and value of your car, you may decide to keep both collision and comprehensive even after your auto loan is paid.
The deductible for collision and comprehensive is separate from that of liability, so you can increase the deductible on those options to lower your premiums.
Deductibles range from $250–1,000, although $500 is one of the most commonly chosen rates. To decide on the deductible that is right for your policy, determine how much money you can safely pay out of pocket in the event you need to submit a claim.
If you can afford to pay $500 up front, that option will cost you less money in premiums than a $250 deductible.
However, if you can only afford $250 for a lump sum deductible payment, then you may need to pay a little more for your premium and have that cost spread out over installment payments for your insurance.
To budget for your insurance deductible, set up an interest-bearing savings account just for your car insurance, and allocate a certain amount of dollars from each paycheck to go to this account.
As your account grows, you can feel more confident changing your insurance policy to reflect the new deductible.
If you never need to use the money, you will have a nice little savings account growing, but if you do need to submit a claim, you will have the money you need to pay your deductible and get your car repaired.
Choosing the Right Car Insurance Coverage
Regardless of whether you have an auto loan or not, you will always need to carry liability coverage on your car. The minimum amount of coverage is set by state law, but the more you can afford to buy the safer your assets will be.
When it comes to collision and comprehensive, you have more flexibility as to the amount of coverage you get.
You will be required by your lender to carry both of these optional policies if you have an auto loan, but even if your car is owned outright you may want to continue the coverage.
You can always reduce your insurance rates by raising your deductibles while still maintaining full coverage for your vehicle.
All other car insurance policies are optional and will depend on your individual needs and what you may be able to afford.
Your lender can dictate what types of car insurance you need when you have an auto loan, but you have the freedom to choose your insurance agent.
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