If you have financed a vehicle, your lender will require that you carry full coverage insurance, which includes liability, any other legally required coverages, collision and comprehensive. This ensures the vehicle will be repaired or replaced if damaged or destroyed.

Learn everything you need to know about the requirements for full coverage insurance on a financed car.

Key Highlights
  • Lenders require that you carry full coverage car insurance on a financed vehicle to protect their investment in your vehicle. 
  • Full coverage includes liability, which is required in most states, any other legally required coverage, collision and comprehensive. 
  • According to 2023 data, the average annual car insurance rate for full coverage is $1,682 for a 100/300/100 policy with $500 comprehensive and collision deductibles.

Do I need full coverage insurance on a financed car?

If you have a loan or lease on the vehicle, you must carry full coverage insurance. Technically, your financing company owns your car until you make that final payment, so it requires full coverage to protect its investment.

“When financing a vehicle, the lender usually requires specific types of coverage to protect [its] investment,” says Scott McAlpin, general manager at Airport Chrysler Dodge Jeep in Orlando, Florida. “Comprehensive and collision coverage is often mandatory to protect against damage to the vehicle itself. These requirements aim to ensure that the lender’s financial interest is safeguarded.”

If your vehicle was damaged or destroyed and you are not fully covered by insurance, your lender would have to pursue you for the money to repair or replace your vehicle which would be difficult for both of you, compared to collecting from an insurance company.

In almost all cases, you must provide proof of insurance to your lender before you can drive the vehicle off the lot. 

What are the car insurance requirements for a financed car?

While most states require drivers to carry liability coverage to drive on public roads, liability doesn’t repair your vehicle if you are in an accident – it only protects people and property that you damage with your vehicle. 

If you have financed your vehicle, your lender will require that you carry full coverage so your car is repaired or replaced after an accident or other incident.  

Full coverage car insurance consists of the following:

  • Liability insurance: This coverage will help pay for property damage, medical and legal costs for injuries to others in any at-fault accidents you cause. Liability will not pay to repair your vehicle. Any other legally required coverage, such as personal injury protection, is also included.
  • Collision insurance: This coverage will pay to repair your vehicle after a collision regardless of who is at fault. 
  • Comprehensive insurance: Comprehensive will cover damage caused by something other than an accident. It covers damage from flooding, hail, fire, vandalism, falling objects or animal collisions and theft.

Does auto insurance cost more for a financed car?

Full coverage insurance is more expensive than simply carrying liability coverage. The reason? Full coverage means your insurance company is now on the hook for replacing your vehicle if it is destroyed in an accident or other incident. 

According to CarInsurance.com’s 2023 rate analysis, the average cost for liability-only coverage at 50/100/50 is roughly $637 per year, compared to the average of $1,682 a year that full coverage costs. 

Most states have minimum liability coverages, which is the absolute minimum amount of coverage you must carry to legally drive. When we ran the numbers, the state minimum average was $511 per year.

While carrying full coverage will certainly cost more, it’s not only a requirement from your financing company, it’s also a good idea. Even after your vehicle is paid off, unless you can easily afford to replace your vehicle or cover an expensive repair bill, dropping to just liability is not a  wise choice. 

If your vehicle is old enough that you would not repair it after an accident, that is the time to consider dropping full coverage for liability only. 

Do I need gap insurance on a financed car?

Gap insurance kicks in when your financed vehicle is totaled. Gap insurance will help cover the “gap” between what you owe on the totaled car and what your insurance company pays out after an accident – the actual cash value of the vehicle. If you are leasing a vehicle, your lender may require gap coverage. 

“Gap insurance is highly advisable for financed vehicles. It covers the gap between the car’s current market value and the amount you owe on your loan,” McAlpin says. “In the event of a total loss, this coverage ensures you are not left responsible for paying off a car that no longer exists.” 

Car insurance pays out the actual cash value of the vehicle, regardless of what you owe on your loan. If you total a fairly new car, there is a very real possibility you will owe more on your car loan than your insurer will pay out for the vehicle. 

This is because new cars lose quite a bit of their value once they leave the dealer lot. Gap insurance will pay the difference, so you don’t have to pay off your car loan out of pocket. 

Tip iconExample

Here’s a quick example of how gap coverage may be a good choice.

If you borrow $25,000 to finance your vehicle and total it shortly afterward, your full coverage insurance will pay the actual cash value of your vehicle which is almost always less than what you owe. In this example, it pays out a depreciated value of $22,000, which leaves $3,000 that you will have to cover.

Gap insurance will step in to cover the $3,000 difference. Once your vehicle is a few years old and the value and loan amount are more in sync, you can drop gap coverage. 

Learn more about liability coverage

Liability insurance is required in most states to drive legally. State-required minimums vary by state but rarely provide adequate coverage. 

Liability insurance includes bodily injury and property damage and there are coverage limits for each. Liability coverage is commonly written like this: 100/300/100. 

This means you have $100,000 per person in liability bodily injury coverage. This is the maximum payout per person for the medical bills of anyone you injure in an at-fault accident. 

The policy provides a total of $300,000 in liability injury coverage per accident, which is the maximum paid out for all injuries in an accident you cause.

The final number is your property damage coverage. In this example, you have $100,000 in liability property damage. This coverage will pay to repair the damage you cause to other cars and property.

While liability insurance is available with lower limits, such as 50/100/50, most lenders will require you to carry higher limits.

Tip iconExample: How property damage liability insurance works

If you have property damage liability of $50,000 (written as the third number here: 50/100/50) and you hit and total a $70,000 Tesla, you’ll be financially liable for the difference between the $50,000 your insurance pays and the remainder of the cost of the Tesla replacement — $20,000.

How much is full coverage car insurance?

The cost of car insurance will vary dramatically depending on various factors. Insurers consider your personal risk factors, your ZIP code and information about the vehicle. 

According to CarInsurance.com’s 2023 rate analysis, the average car insurance rate for full coverage is $1,682 annually. The average for a liability-only policy at 50/100/50 is $637 per year, and the state minimum average runs roughly $511 per year.

Learn more about which companies offer the cheapest full coverage auto insurance

Minimum full coverage for a financed car in your state 

There are no state minimums for full coverage car insurance on financed vehicles simply because you cannot buy minimum liability when you buy full coverage. Your lender will determine which coverages you must carry – it may require a specific deductible on your collision and comprehensive coverages. 

Suppose you drop your coverage after the vehicle is financed. In that case, you will violate your financing agreement, and your lender may force you to place costly coverage on your car. 

The minimum deductible for a financed car

Full coverage car insurance comes with a deductible ranging from $500 to $2,500, depending on the insurance company. Your financing agreement may require that you carry a specific deductible amount. In many cases, the required deductible is $500, but it varies from lender to lender. 

Final thoughts: Auto insurance for a financed car

If you have financed or leased your vehicle, your lender will require that you carry full coverage. Technically, your financing company owns the car until you have paid it off, so they want to be sure it will be repaired or replaced if it is damaged or destroyed in an accident or other incident.

While full coverage is more expensive than a liability-only policy, shopping your coverage regularly will help you find the best full coverage policy at the best price. 

FAQ: Full coverage insurance for a financed car

Why does a financed vehicle have to be fully insured?

Your lender owns your vehicle until you have paid off your loan. To protect their investment, they want to ensure the car will be replaced or repaired if it is involved in an accident. 

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

When you signed your financing contract, you agreed always to carry full coverage on the vehicle so dropping your coverage will put your loan in jeopardy. The lender could have the vehicle repossessed or they may force-place coverage on your vehicle and add the premium to your loan amount. Forced-place insurance is never the cheapest option, so it makes financial sense to keep your policy. 

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

Once your loan is paid off, you can do whatever you choose with car insurance if you carry the state-required liability minimums. However, unless you can easily afford to replace or repair your vehicle, you should hang on to your full coverage. You will be on the hook for all costs to get your car back on the road after an accident or other incident.

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

Yes. Regardless of whether the car is new or used, your financing company will require that you carry full coverage on the vehicle. If the car is destroyed or damaged in an accident or natural disaster, your lender will want it repaired or replaced to protect their investment. 

Learn more: Do I need full coverage on my new or used car

Do banks have different rules on minimum full coverage for a financed car?

In most cases, the answer is no. Banks, manufacturer lenders, credit unions and other lending institutions require full coverage on a vehicle they are financing. Until you make the last payment, they own the vehicle, so they want it protected from disaster. 

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

Insurance laws are controlled at the state level, so the minimum requirements for liability insurance vary by state. Most states do not have insurance requirements for financed vehicles, it is the lender (the company that put the money up to purchase your vehicle) that sets the insurance requirements for cars they finance. 

Laura Longero

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Laura Longero

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Laura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.

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John McCormick

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John is the editorial director for CarInsurance.com, Insurance.com and Insure.com. Before joining QuinStreet, John was a deputy editor at The Wall Street Journal and had been an editor and reporter at a number of other media outlets where he covered insurance, personal finance, and technology.

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