Your insurance coverage is separate from your car loan, meaning you must purchase an insurance policy on your own. Most lenders require a full-coverage policy, so you have to choose one that meets your bank's requirements. Read your contract over thoroughly or ask your lender for its requirements before pursuing a loan.
Full Coverage
Your lender likely requires you to maintain a full-coverage insurance policy until your loan is paid in full. This coverage is the most expensive you can purchase, as it covers your vehicle in the event of an at-fault accident. Liability coverage, required in most states, only covers damage to other people and property. Collision coverage, which fulfills the full-coverage requirement, also includes liability and comprehensive coverage, offering all-around protection. The policy pays your vehicle's market value to your lender or for vehicle repairs.
Additional Lender Requirements
Lenders often also require borrowers to maintain higher limits. Each state has its own personal injury and bodily injury requirements, but lenders often require increased coverage. Expect to increase bodily injury and property damage limits and to lower your deductible. A deductible is the amount of money you pay out of pocket for repairs to your car when you're at fault. Deductible options range from $0 to over $1,000, but lenders often require $500 or less. Increased limits and a lower deductible raise your policy cost.
Budgeting
Because a full-coverage insurance policy is the most expensive you can purchase, the price can easily exceed your car payment. Before pursuing a car purchase, check the price of your policy cost with your insurance provider. For an accurate quote, expect to provide the vehicle identification number, or VIN, and the lender's coverage requirements. You may benefit from obtaining quotes from different companies. Once you have your policy price, ensure you can afford your car and insurance payment.
Considerations
A full-coverage insurance policy doesn't guarantee your loan will be paid off if your insurance company declares your vehicle a total loss. A total loss occurs when the vehicle's repair costs are too close to its market value. Your insurance company pays only for the vehicle's market value, not your total loan amount. Consider purchasing a gap insurance policy if your loan balance exceeds your vehicle's value. Gap insurance pays your loan balance if your insurance payout isn't enough to satisfy the loan.
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