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Do you need full coverage if you have a car loan?


Yes, normally you will need full coverage on a vehicle if you are still paying a lien holder for the loan you have out on it.

While your state will require you have at least your state's minimum liability insurance on your vehicle, if you have a lien holder on the vehicle, they will require you to carry liability insurance, collision insurance, and comprehensive insurance (often termed "full coverage").

It is not a state requirement to have full coverage (meaning at least the minimum state auto insurance limits plus physical damage coverages), but it's usually a requirement from your finance company or lender. The lender is your lien holder and thus the car is their asset until you pay it off. This is why they have a say about what insurance coverages you obtain and maintain on the financed vehicle.

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.

To find out if you must have full coverage on a specific financed vehicle, speak to the lien holder and/or read through your lease or loan paperwork. Most lien holders require full coverage since the car is their asset, and if it is damaged or totaled out and you do not have insurance to cover it, they will have to come after you personally to repair it or pay off a totaled car, which is much harder than your insurance company taking care of it for you.

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5 Responses to "Do you need full coverage if you have a car loan?"
  1. Shari Derrick

    If I buy a car that may be a 2002-2006 would the auto that I purchase the car from insist that I have to have full coverage. Because whatever I buy would be a short term I am talking about maybe no more than 4 to 6 months can't afford full coverage. This is why I need a cash car can't afford making payments on a car for a long period of time and full coverage insurance.

  2. Amy Cannon

    What if your vehicle does not run and the payment is up to date? I am looking to file a lawsuit under North Carolina lemon law and presently gathering data and trying to find out what I need to do to resolve the issue. I can't drive it and I can't afford to have it fixed and I can't afford with the payment and full coverage for something that is no in your control.

  3. claus hattasch

    I am in Connecticut. A friend has a loan on a car. He went to a insurance agent and got insurance and put a lien on it. The car got totaled. Now the insurance agent is telling him he did not collision insurance only liability. He has a paper from them showing the lien. Can they do that in Connecticut?

  4. cc

    If the car is stored and has no registration, why can the financial company require insurance coverage of liability? the insurance would never need to pay out. No driver, no registration, stored. Liability Insurance isn't required by the stat unless a car is registered. Why would a finance company require it?

    1. A-A-Ron January 28, 2017 at 10:14 AM

      As was stated in the article you don't own that vehicle outright until the loan is paid off. Just because your vehicle is in storage and registration is not on it you are correct the state doesn't care about liability unless it's registered. The finance company cares because it's still their asset until you pay it off which means they still have a financial interest in it. If it goes up in flames and you don't have coverage they have now lost their asset, and have nothing to repo if you don't pay your bill, and ultimately you're responsible for repaying them for the money you borrowed.

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