What Insurance Do You Need When Financing a Car
When financing a car, lenders require you to carry insurance that protects their financial interest in the vehicle. The specific requirements vary by lender and state, but most ask for full coverage rather than basic liability alone.
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Core Coverage Lenders Require
Lenders typically mandate three types of insurance on a financed vehicle:
- Liability insurance — covers damage and injuries you cause to others in an accident you are at fault for.
- Collision insurance — pays for damage to your car from a collision with another vehicle or object.
- Comprehensive insurance — covers non-collision damage such as theft, vandalism, fire, flooding, or falling objects.
These three together form what is commonly called full coverage. The lender sets minimum limits, and you must maintain them for the life of the loan.
Gap Insurance: Often Required
Gap insurance covers the difference between what you owe on the loan and the car's actual cash value if it is totaled or stolen. Many lenders require gap insurance at the time of financing, especially if your down payment is small or the loan term is long. Some dealers roll the gap premium into the loan balance, which increases your total cost.
State Minimums Are Not Enough
State minimum liability requirements are usually far below what a lender will accept. Driving with only state-minimum coverage on a financed car violates your loan agreement and can trigger a penalty rate or force-placed insurance from the lender, which is significantly more expensive.
What Happens If You Drop Coverage
If you let a policy lapse or remove required coverage, the lender may:
- Charge a fee for force-placed insurance.
- Add the insurance premium to your loan balance.
- Consider the loan in default and accelerate the remaining balance.
Keeping continuous coverage is a non-negotiable part of the financing contract.
How Much Coverage to Carry
Beyond what the lender requires, you should consider your personal financial risk. Higher liability limits protect your assets if you cause a serious accident. A table of common lender requirements can help you compare:
| Coverage Type | Lender Requirement | Typical Minimum Limit |
|---|---|---|
| Liability | Required | Varies by state; often $25,000/$50,000/$10,000 |
| Collision | Required | Deductible typically $500–$1,000 |
| Comprehensive | Required | Deductible typically $500–$1,000 |
| Gap | Often required | Covers loan-to-value shortfall |
Tips for Managing Insurance on a Financed Car
Shop for rates before you finalize the loan, and let your lender know you plan to switch carriers. Set up automatic payments to avoid a lapse. Review your policy annually to make sure coverage limits still meet the loan terms and your needs.