Taking out an auto loan might require you to buy more insurance than your state’s minimum requirement
Got your eye on a new (or new-to-you) car? Before you head to the bank to fill out paperwork for a loan, you might want to think about how it will affect your insurance rates.
In certain cases, your premium will go up if you have an auto loan. Why? Lenders require you to have certain kinds of coverage that often go beyond the minimum required by states.
For instance, most states generally don’t require collision or comprehensive coverage, though they do require liability coverage. However, if you take out an auto loan, the lender may require you to add collision and comprehensive to your policy, which can make your premiums go up.
Now, the more frugal among you may be tempted to add coverage long enough to satisfy your lender, only to drop it after you get the loan. This is a bad idea.
When you take out an auto loan, the lender becomes an official lien-holder on your car, which basically makes them a joint owner. As a joint owner, they will require that your insurance policy lists them as the loss payee or an additional insured party. Your insurance provider will even ask if your car has a lien-holder.
When the insurance company puts the lender on the policy, the lender will also put recorded on your vehicle’s title with your state’s Department of Motor Vehicles (DMV). The lender will have access to that record, and if there are changes in your coverage, the DMV may tell them.
If this happens, 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 the car and sell it to pay off the loan. And if the amount gained from the sale isn’t enough to pay it off, they can then sue you personally to get you to make up the difference.
If you already have different kinds of coverage on your policy—which is a good idea in order to protect your car—then your rates may not go up if you take out an auto loan. But your premium will likely rise if you don’t.
Source: Money Under 30: “How Having An Auto Loan Affects Your Insurance Rates”