If you financed your car, you will need full coverage auto insurance.

To drive legally, you must have your state’s required minimum liability insurance coverage. But if you drive a financed car, your lender will require you to carry liability insurance, collision insurance, and comprehensive insurance, which comprises full coverage.

Here’s what you need to understand about insurance requirements for financed cars and how it works.

Key Highlights
  • Full coverage car insurance is required for most auto loans because it protects the lienholder from loss.
  • The average car insurance rate for full coverage is $1,682 for a 100/300/100 policy with a $500 comprehensive and collision deductible.
  • Gap insurance helps bridge the gap between what you owe on a car that’s totaled and what your insurance coverage pays out.

Financed car insurance requirements

Most people don’t buy a car outright – they take out a car loan to pay for it. That means the car is still owned by the lender until the loan is paid off.

Are there car loan insurance requirements? Yes. The lender will want you to have full coverage car insurance on the financed car to protect their investment.

Otherwise, if the car is damaged or totaled, the lender would have to get the money from you for repairs or to replace it, which is much harder than having the insurance company pay for it.

Full coverage car insurance consists of the following:

  • Liability insurance – pays for property damage and injuries to others in accidents you cause
  • Collision insurance – pays for damage to your car regardless of who caused the accident
  • Comprehensive insurance – pays for damage to your car from flooding, hail, fire, vandalism, falling objects or animal collisions, and also covers theft

How much is full coverage car insurance?

The average car insurance rate for full coverage is $1,682 a year for the following, based on CarInsurance.com’s rate analysis.

The average for liability only is $637 per year and the state minimum average costs $511 per year.

Liability insurance is commonly written like this: 100/300/100. Here’s what that means:

  • $100,000 in liability injury coverage, the maximum payout per person for medical bills of those you injure in an accident you cause.
  • $300,000 in liability injury coverage per accident, the maximum paid out for all people injured in an accident you cause.
  • $100,000 in liability property damage, pays to repair the damage you cause to other cars and property.

Liability insurance is available in lower limits, such as 50/100/50, but generally, lenders require the above limits.

However, what you pay will depend on your own driver profile – your age, driving record, type of car you drive, where you live – and each insurer will calculate your price differently based on those factors.

So doing a car insurance comparison is the best way to save money, as rates vary significantly among carriers.

Does auto insurance cost more on a financed car?

When it comes to the car itself, insurance premiums are based on the value of the vehicle being insured, not the amount owed on the vehicle.

So, if you are seeking the same coverage on a financed car vs. an owned car, the insurance premiums should not differ as long as all other variables are the same: The car make, model, appraised value, coverage limits, location and driver profile.

Do I need gap insurance on a financed car?

Gap insurance helps bridge the gap between what you owe on a car that’s totaled and what your insurance coverage pays out.

Since car insurance covers the actual cash value of the vehicle, not what you owe to a lender on a car loan, gap insurance can be a wise choice.

Tip iconExample

Let’s say you get a loan to buy a car for $22,000 and total it in an accident. Your comprehensive or collision insurance will pay out up to the actual cash value, which is typically lower than the loan amount.

In this case, let’s say it’s $16,000. But if you still owe more than that on the loan – say $19,000 – you would have to pay the difference for a car you can’t drive. Gap insurance would cover the $3,000 difference.

It is typically cheaper to buy gap insurance from your insurance company rather than through the dealer.

Gap Insurance Providers – Which companies sell Gap insurance?

FAQs: When should you drop full coverage insurance on your car?

What happens if you don’t have full coverage insurance on a financed car?

If you drop the required auto insurance coverages from a financed vehicle, it is a violation of your finance contract and may put your loan in jeopardy.

Also, the lender could place single-interest coverage (force-placed insurance) on the vehicle and add the premium to the loan. This type of coverage is expensive and does not provide any coverage for you, just the lender.

Can I drop full coverage auto insurance once my car loan is paid off?

Yes. You can drop full coverage on your car once it’s paid off, but that doesn’t mean you should. If your car was stolen or destroyed in a crash, would you have enough savings to replace it? If not, you should consider maintaining full coverage car insurance.

Do I need full coverage on a financed car if the car is used?

Yes. If you’re financing a car, whether used or new, and you’re going to be making payments on it for some time, your car insurance policy should be for full coverage. And there’s a good chance that your lender will take the decision away from you and simply require it.

All of that said, there are a couple of states where you can get away with not having full coverage, and you can always think of some hypothetical where you could make an argument that you don’t need full coverage.

But talk to any responsible person on the planet, and most of them will tell you to get full coverage on a financed car, whether it’s used or brand new.

You don’t want to be in the position where you buy any car – used or new – and you wreck it while you still have 42 payments before it’s paid off. If it would be difficult to make payments on a car that you no longer can drive, then you should get full coverage, and again, your lender may require that you’re insured before you drive your car off the lot.

Read our expert’s recommendation on Do I need full coverage on my new or used car?

Do different banks have different rules on auto insurance for financed cars?

Generally, no. Banks may differ depending on state laws, but, as a rule, most financial institutions will require you to have full coverage if you’re financing a vehicle purchase. After all, until you pay off your car, it’s not really your car: It belongs to the lender.

Do states have different rules on auto insurance for financed cars?

Yes. In fact, each state regulates all insurance differently. There are no national standards for car insurance – or any type of insurance. Check with your state’s DMV or Department of Insurance if you have questions about your state’s insurance requirements. Or, call your car insurance company, which can advise you on whether you need full coverage for your car.

  • CarInsurance.com commissioned Quadrant Information Services to pull rates in 2022 for a 40-year-old male driver with a good driving record, a 12-mile commute to work and full coverage insurance (100/300/100 with a $500 deductible).
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Geoff Williams
Contributing Researcher

Geoff is a journalist who specializes in personal finance and small business issues. His byline has appeared in numerous publications over the years, including LIFE Magazine, CNNMoney.com, National Geographic Kids, Ladies' Home Journal, The Washington Post, Reuters and U.S. News & World Report.