Question: Say I purchase a vehicle through a private owner and make monthly payments to them (they put a lien on the title). Do I, as the buyer, have to purchase full coverage on the vehicle?
Answer: It’s up to the people you’re making car payments to. Any traditional lender would require that you carry state liability coverages as well as physical damage coverages of collision and comprehensive, which is what people refer to as full coverage.
If I sold someone a car and the buyer were going to be making payments to me for it, I would place detailed requirements for the auto insurance coverages into the sales agreement. I would require that the new owner carry collision and comprehensive on the vehicle until he paid it off since these are the coverages that protect the car (my asset).
If the seller is allowing you to make car payments to them and has a lien on your title, then as the lienholder he can place requirements on you to carry certain car insurance coverages. If you have certain car insurance conditions in your agreement, then you must abide by them.
A lienholder can request not only what coverages you carry, but also to be listed on your car insurance policy as an additional insured.
This allows them to be notified of any policy changes or cancellations that you may make to the auto insurance policy. Once the car is paid off, they can be taken off your policy and taken off the title as the lienholder.
Even if the seller isn't requiring you to obtain full coverage as part of your car insurance policy, it would still be wise to do so. If you were in an accident, physical damage coverages would cover the cost of damages to your vehicle or the actual cash value if totaled out (minus your associated deductible amount).
Unfortunately, you cannot obtain gap insurance if you think you might owe more than the vehicle is worth since it is only available if you have obtained your car's financing through a conventional auto loan or lease.
Without collision and comprehensive coverages, if you're in an at-fault accident you'll be responsible for the vehicle’s damages. If the car were totaled out in the accident, you would no longer have a car and still have to pay the balance of what you owed to the seller for the vehicle.