Do You Have an Auto Loan? It Might Be Making Your Auto Insurance Rates Go Up
Depending upon your lender, an auto loan might require you to buy more auto insurance than your state's minimum insurance requirement
Are you looking to buy a new car? Before you sign that contract, take a moment to figure out how that new car and the loan that comes with it will affect your auto insurance rates.
You typically pay more for auto insurance with a new car regardless of lender
In most cases, your auto insurance premium will go up with a new car. Newer cars, while safer with the latest technology, are more expensive to repair and replace than your old car. So you'll already be spending more money on auto insurance.
Some Lenders Require Additional Auto Insurance Coverage
Depending upon your finance company, you might end up spending even more money on auto insurance coverage than you might expect. Some lenders require insurance coverage and limits that exceed the minimum amount required by the state. So while you might have enough auto insurance to be legal on the road, your lender might not see it that way.
Most states, for example, don't require anything more than general liability auto insurance coverage, which takes care of damage to other vehicles and property should you be responsible for a crash. But many lenders go beyond that and require you to have collision insurance coverage, as well, which protects the lender by repairing the vehicle.
You Can't drop insurance coverage after you get your loan
You might be tempted to cancel collision coverage or any additional requirements set by your lender after you get your loan. That's a bad idea. The lender is your lien holder and is recorded on the vehicle's title with the Division of Motor Vehicles (DMV). Either the insurance company or the DMV can notify the lender when changes are made your auto insurance policy. The lender may also periodically access your information to ensure that your coverage limits meet the minimum amounts for financing.
Consequences of reducing or eliminating coverage on a vehicle with an active loan
The lender may accelerate the payoff of your loan. Even worse, since you will have violated the terms of the loan, the lender will legally be able to repossess it. If the vehicle doesn't sell for enough money to pay off the loan, the lender can sue you to make up the difference.