There are a number of implications that come with financing a vehicle, but not all of them will result in an increase in premium payments for you.
Key Takeaways
- When you get a car loan, the lending company will insist that you have insurance to safeguard your investment.
- In addition to the minimal standards imposed by the state, lenders will insist that you have coverage for both collision and comprehensive. This could increase the cost of your insurance if you did not previously intend to purchase that type of coverage.
- Lenders will want to be named as the payee on your policy; nevertheless, the act of listing a loss payee does not change the premium that you pay for insurance.
- Even if you intend to store the vehicle for a portion of the year, the lender may insist that you have continuous coverage for the vehicle.
Lenders Require Full Coverage
The fact that lenders require both comprehensive coverage and collision coverage in addition to the bare minimum requirements for auto insurance in a state is the primary factor that contributes to the increased cost of insuring a financed vehicle. When compared to a policy that merely covers liability, an automobile insurance plan that includes comprehensive coverage and collision coverage will result in higher premiums for the driver. When you pay for a vehicle out of your own pocket, you have the option of purchasing simply the minimal amount of liability insurance required by your state. This will save you money. Example: Joan paid $10,000 in cash and borrowed $10,000 to buy a car that cost $20,000, but she decided against purchasing full coverage insurance since she believed the likelihood of incurring significant damage was quite low. The lender demanded that borrowers have both collision and comprehensive insurance. Because the vehicle was still relatively new, the increased coverage needs caused the auto insurance rate to increase by a factor of two.The Lenders Turn Into Payees
Lenders will request that they be identified as the payee in the event of a loss and may also request that they be listed as additional insured for the vehicle that they have financed. Adding a lender to your policy as a loss payee or additional insured does not result in any further costs on your part. For illustration, Jean used $10,000 in cash and obtained a loan for the remaining $10,000 in order to buy an automobile that cost $20,000. She protected the vehicle against the possibility of a loss by purchasing full coverage insurance and naming the lender as a loss payee on the policy. The car insurance prices were equal.Coverage That Is Restricted During the Months That Are Not in Use
You might believe that if you don't drive your car during the year, you don't have to worry about paying for insurance coverage, but unfortunately, this is not always the case. Most financed autos are obliged to carry full coverage all year round until the loan is paid off. The lender decides. When your vehicle is not in use, you may be able to store it with the permission of some lenders; but, in most cases, you will be needed to provide documents from your insurance provider as well as your signature to prove that you will not be driving the vehicle. There is a good chance that the lender will provide a specialized form for your insurance agent to complete. It is in your best interest to inquire with your lender about the prospect of receiving a discount on the storage of your vehicle because this might result in significant cost savings. John financed a brand-new convertible so that he could cruise around in it during the warm weather months. Because he was concerned about the vehicle's health, he chose to drive an older pickup truck during the winter months. He inquired with his lender about the possibility of reducing his insurance coverage during the winter months to include only comprehensive. After John's request was granted, the lender gave him some paperwork to fill out and instructed him to take it to his insurance agent for the last steps. John's insurance rate was cut all winter long due to the adjustment in coverage. He will need to contact his insurance agent in the spring to return to full coverage.Lenders Can Change Your Insurance If You Lapse
Insurance carriers update loss payees about any changes to the policy involving the vehicle they are listed on. These modifications include late payments, coverage revisions, and policy cancellations. So if you make any modifications to your automobile insurance policy, your auto loan company, as a payee, will be the first to know. Joe funded the purchase of a new vehicle through his credit union, and he named the credit union as a loss payee on his auto insurance policy. After a few more months, he fell behind on his car insurance payments and paid after the deadline had passed. When he finally sent in his contribution, fortunately, he was still inside the grace time allotted to him. The notification that the payment was overdue was delivered to the credit union. The creditor contacted the insurance firm to inquire as to whether or not the payment had been submitted. The confirmation of the payment was checked, but if the money hadn't been sent in, the lender might have put a third-party car insurance policy on the vehicle. This would have happened if the payment hadn't been submitted.When Financing a New or Late-Model Car
Your auto insurance premiums are likely to go up if you get a newer or more recent model of vehicle, regardless of whether you buy a brand-new vehicle or upgrade from an older model. When you insure a more expensive vehicle, your premiums almost always go up as a result. Lots of factors affect the cost of insurance. Your rates may be affected by a variety of factors, including the age of your vehicle and its overall safety rating. Always check with your insurance agent to get an estimate on the insurance before making a car purchase. Prior to purchasing a vehicle, you need to include the cost of insurance in your financial planning. Jill wished to purchase a new vehicle and was certain that she could afford the monthly payment of approximately $500, which would include the cost of car insurance. An evaluation found that her old automobile had a trade-in value of approximately $4,000, and she decided to take advantage of it. Jill requested a 60-month loan so she could keep both interest and monthly payments in check. She plugged the trade-in value and desired monthly payment into a calculator and determined that she could afford a car that cost roughly $32,000. This, however, did not cover the cost of car insurance. After looking at a few different makes and models, Jill contacted her auto insurance company and learned that the premium for her newly purchased vehicle would be $80 per month. This would amount to approximately $4,800 over the course of the automobile loan, which indicates that a more fair sticker price would be somewhere around $27,000 in order for her to fulfill her objective of an affordable total price of $32,000.