When you shop for a new car, chances are you’ll take out a car loan to help cover the cost. But before you buy that vehicle, make sure you’re familiar with all of the related expenses, including insurance. You’ll need to meet specific insurance requirements when you finance your car, so your new insurance premiums might be higher than you expect.
When you finance a car, the lender will usually require you to have a minimum amount of insurance, often including collision and comprehensive coverage. Since you’ve only paid for part of the car out of pocket, the vehicle itself is the collateral on your loan. The lender wants to protect that collateral in case you don’t repay the loan, so they’ll require you to carry insurance to cover the vehicle’s cost if it’s in an accident.
Before you can drive home your new car, you will need to meet the lender’s car insurance requirements. Chances are you’ll be required to carry several types of coverage.
Collision coverage helps pay for repair or replacement costs resulting from an accident. It applies whether or not you were at fault for the crash.
Comprehensive insurance applies to events that didn’t involve a collision with another car or object. This coverage can help pay for repairs or a replacement if your vehicle is damaged by a falling tree, weather, vandalism, or another cause.
Most states require drivers to carry a minimum amount of bodily injury liability coverage. This type of coverage helps pay for expenses related to injuries that your passengers or the driver or passengers in another vehicle sustain in an accident.
While your lender might not require this coverage, it can increase your protection when you’re on the road. Underinsured motorist insurance can help cover expenses if another driver hits your car but doesn’t have enough insurance to cover all of the expenses. Uninsured motorist coverage helps cover your expenses if you’re in an accident but the other driver doesn’t have insurance.
You may also want to buy gap insurance to help protect you if your vehicle is totaled. If you take out a loan for $20,000, but your vehicle is a total loss in an accident a few months later, the vehicle’s value could have declined to $15,000. After your insurance pays out that value, you would still be responsible for paying the remaining $5,000 on your loan, even though you no longer have the vehicle. In this instance, gap insurance would cover that $5,000.
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Your lender will specify the types and amounts of the car insurance policies that you’ll need, but then you can shop around and choose your insurance provider. You can get free online car insurance quotes today to see which provider offers you the best deal on the coverage you need.
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Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.
