Yes, you will need full coverage on a vehicle if you have a car loan.

To drive legally, you have to 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, often called “full coverage.”

Here we’ll explain insurance requirements for financed cars, so you’ll know what type of insurance coverage you need, and how it works.

Key Highlights
  • Full coverage car insurance is required by most auto loan lenders.
  • Lenders often consider full coverage to be 100/300/100 liability coverage and comprehensive and collision coverage.
  • The average car insurance rate for full coverage is $1,758 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 and usually costs about $41 a year with major insurers.

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 $1,758 a year for the following, based on’s rate analysis:

  • $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
  • Comprehensive and collision insurance, pays out up to the actual cash value of your car to repair or replace your car, with a $500 deductible

This is commonly written like this: 100/300/100. 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?

Car insurance premiums are based partly on the value of the vehicle being insured, not the amount owed on the vehicle.

That means, 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 like car make, model and value, coverages and driver profile.

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.

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.

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, in this scenario say $19,000, you would have to pay the difference. That’s $3,000 for a car you can’t drive any longer. Gap insurance would pay that $3,000 instead of you.

It is typically cheaper to buy gap insurance from your insurance company, instead of through the dealer.

The average gap insurance policy costs about $41 a year, according to’s analysis, compared to about $500 to $700 that dealerships generally charge.

Gap Insurance Providers – Which companies sell Gap insurance?

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 once your car is paid off, but it doesn’t necessarily mean you should. If you decide to carry your state minimum required liability insurance, be sure you understand the risks of not having comprehensive coverage and collision coverage.

If your car was stolen, 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 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 a little, depending on the state the bank is located in, but as a hard and fast rule most financial institutions are going to operate on the premise that if you’re financing a car your vehicle needs to be fully insured.

After all, until you pay off your car, it’s not really your car. It belongs to the lender that will be left hung and dry if those car payments aren’t made.

Your chances of willingly making payments on a totaled vehicle that you can no longer drive go way down for the lender and so most, if not all, financial institutions are going to insist that your financed car is fully insured before you drive it off the car lot.

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, like homeowners insurance, for that matter. In fact, you can technically get away with not having any car insurance in Virginia and New Hampshire.

That said, Virginia and New Hampshire don’t exactly encourage their residents to drive around uninsured.

For instance, in Virginia, if you don’t buy car insurance, you’ll have to pay an uninsured motor vehicle fee, which, in the spring of 2022, costs $500. And that’s $500 a year. You’ll pay it when you pay your vehicle registration fee. And, of course, if you are in a wreck, you can decide whether that $500 was well spent.

In New Hampshire, you’re hardly let off the hook. You don’t have to buy car insurance, but if you don’t, you have to prove that you can afford to pay for the damage you do to somebody’s car in a wreck – and if you can’t prove that, you may not be allowed to drive.

So for all practical purposes, in every state, there are different rules on auto insurance for financed cars, but you’re going to be buying some form of car insurance.