The Auto Loan You Choose Can Cause Your Auto Insurance Premiums to Increase Unexpectedly
Some auto loans require you to have more insurance coverage than the minimum amounts mandated by the state
Are you looking to buy a new car or to refinance your current auto loan? We typically think about how a vehicle's age and options will affect our insurance rates. But we never think about how the loan will affect our premiums. Having a loan will certainly mean you will have to maintain some collision coverage. But some loans require much more than that state's minimum insurance coverage limits and could end up costing you much more than expected.
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. There are some exceptions, of course. If you already drive a brand new sports car and are trading in for a family sedan, you'll likely see the premium decrease. But newer cars, while safer with the latest technology, are typically more expensive to repair and to replace than your old car was, even when new. So you'll likely already be spending more money on auto insurance just because you get a new car. But if you shop around and play your cards right, it shouldn't be much of an increase unless you have some serious blemishes on your record.
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 policy 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 most lenders go beyond that and require you to have collision insurance coverage, as well, which protects the lender by helping to repair the vehicle. Some lenders go beyond that and require that you have certain coverage limits. This can often happen if you have a vehicle with a very high price tag, one whose replacement value would exceed the policy limits. Think of a brand new Corvette valued at $80,000. If you smash it to pieces five minutes after leaving the dealer's lot, your $30,000 of collision coverage won't even make a dent on the repayment of the loan. In this case, you might be required to have collision coverage that exceeds $80,000.
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 will notify the lender when changes are made your auto insurance policy. Some insurance companies will even contact the lender for permission to make changes that you request. The lender may also periodically check your policy 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 if you make unapproved changes or default on your insurance policy premium. The lender may, at its discretion and subject to the terms of your agreement, secure insurance coverage for you and bill you directly. In this case, you can be guaranteed that the coverage won't be cheap. Even worse, if you have violated the terms of the loan by reducing or eliminating certain insurance coverage, the lender may repossess your vehicle. If it doesn't sell for enough money to pay off the loan at auction, the lender can still sue you to make up the difference.