In most cases, when you finance the purchase of a used vehicle, you are required by the lender to obtain full coverage auto insurance, according to CarInsurance.com. However, when you purchase a vehicle for cash or use a non-auto loan for financing, you are only required to meet state insurance requirements.
Basics
Auto insurance is generally categorized into liability, collision and comprehensive coverage. Liability coverage is required in most states, indicates CarInsurance.com, as it covers your financial obligation when you cause injury or damage to another in an accident. While states do not usually require full coverage, many car owners buy it. Collision coverage provides damage protection when your car is damaged in an accident. Comprehensive covers most other causes of vehicle damage, including storm damage and animal impact.
Lender Logic
Lenders not only finance car loan purchases, they view them as investments. They provide principal loan amounts to earn income through interest payments. The lender wants to protect its investment in the same way a mortgage lender does. If your vehicle is damaged and you do not have comprehensive or collision coverage, the repairs may exceed your capacity to pay. This would potentially cause you to default on your loan. With insurance protection, the lender has more security that the damage will be repaired and the car will retain its value.
Considerations
Even when not required, as with a used car purchase that was not financed, it may make sense to get full coverage. This is especially true when you have a newer vehicle or one that is more expensive. Imagine buying a car for cash with $5,000 to $10,000 and then having it totaled in a one-car accident. Without insurance, you would have to salvage the car for a relatively small price compared to its original value. When the value of your car is much lower, which is more likely if you are not financing the purchase, getting liability may be enough.
Saving on Premiums
Just because lenders require that you get full coverage does not mean that you have to buy expensive coverage. If you are a good driver, your car has advanced safety features and you take advantage of common auto discount opportunities, you can obtain reasonable protection. Many companies offer discounts if you combine your auto and home insurance policies, according to the Federal Consumer Information Center. You also ask for higher deductible of $500 or $1,000 to lower your monthly premiums, if allowed under the terms of your loan agreement.
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