To determine if your lender can repossess your vehicle for failing to maintain an insurance policy, read your loan contract. Maintaining full-coverage insurance is an auto loan requirement, but lenders differ on penalty actions. Some lenders may choose to automatically add an insurance policy to your loan account, which raises your loan payment.
Lender Penalties
Your lender's penalty for not maintaining insurance is stated in your loan contract. Your lender may repossess the vehicle or choose to add its own insurance coverage. If your lender adds its own coverage, expect an increase in your monthly loan payment. Lender-provided insurance policies protect only the vehicle in the event of a loss. The coverage is more expensive than you can obtain on your own and does not meet state required coverage requirements. You may face penalty fees from your state for lack of liability insurance if your car remains on the road.
Insurance Notification
Your insurance company notifies your state and lender of any insurance changes. If you let your insurance lapse, cancel or change your coverage, both your state and lender will find out. Both your lender and your state motor vehicle department are likely to offer you a grace period, allowing you several days or more to correct the insurance issue or provide proof of coverage if a mistake was made. Correct the issue as soon as possible to avoid defaulting on your loan contract.
Correspondence
Your lender is unlikely to send out a repossession company to seize your vehicle without notifying you. Expect to receive phone calls and mail from your lender about your insurance issue. If you avoid your lender, it will start the repossession process if your loan contract states that repossession is a penalty. If the lender increases your car payment because of a policy it had to purchase, you'll receive a bill that reflects your new car payment amount. You must pay your new loan payment amount to avoid loan non-payment issues.
Repossession
If your lender repossesses your vehicle, it will significantly damage your credit. You may have the opportunity to purchase your vehicle back from your lender, but the repossession will remain on your credit report for at least seven years. If you do not get your vehicle back, your lender will sell it instead. If the vehicle is sold for less than your loan payoff amount, you must pay the balance due. Avoid repossession issues by talking to your lender and purchasing the correct insurance coverage.
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