A lien is a legal right to possess a property or vehicle used as collateral for a loan if certain obligations aren’t met. So, a lienholder is a person or organization having a legal interest on the property belonging to someone else. Usually, a lender has a lien on the car as a guarantee for the loan and they stand to lose if the car is stolen, damaged or totaled. That is why they normally include insurance requirements on a car loan contract and therefore they can determine the amount of coverage, which can be more than what the owner was willing to buy.
Lienholders usually insist on full coverage which includes, Liability, Collision and Comprehensive covers. They also insist on some sort of GAP insurance, which makes sure the loan is paid in full even if Actual Cash Value paid by the insurance company is below what is owed on the vehicle. In addition, they may impose limits on deductibles so that people cannot increase them over a certain threshold to save money on premiums. Hence, normally car insurance costs more when you have a loan on the auto or it is leased than if you were to own it outright. But it comes with better coverage.
Considering most owners with new or nearly new automobiles would probably want full coverage anyway, they may not see their lenders’ requirements as excessive. But they may not be able to drop Collision and Comprehensive when they feel they aren’t necessary anymore since the value of the auto has dropped a lot.
But GAP insurance isn’t taken unless you have a loan. GAP coverage can add between $50 – $200 a year on your car insurance costs depending on the value of the vehicle. On average, it costs around $140. But choosing the right carrier can reduce costs. For example, Nationwide and Travelers are the cheapest companies for GAP insurance as they charge $50 a year on average.
The dealers may want to get in on that since they sell GAP insurance as well. However, GAP coverage from a dealer is usually more expensive and requires one off payment, which they may offer to add to the loan. Generally, it is advantageous to buy GAP coverage from your auto insurer since it is usually cheaper, can be paid monthly with your policy installments and can be cancelled when you pay off the loan.
Lienholders often require their interest to be noted on the policy as an interested party or loss payee so that they are informed of any changes or cancellation. You will need the lender’s name, address and contact details to add them onto your policy. Then, your insurer can send a confirmation of coverage to the lender.
Motorists need to have Collision and Comprehensive coverage to add a lienholder’s interest on their vehicle insurance policies. Otherwise, there is no point in adding them since liability only policies don’t come with any physical damages coverage and therefore there is no money to claim.
Adding the lender on a car insurance policy makes sure that policyholder cannot just get the claim check and cash it because repair claim checks cannot be paid directly to the owner when there is a loan. And lenders get paid first when the vehicle is totaled up to the loan amount. If there is any money left, it is paid to the policyholder. This is how they can use the vehicle as a security for the loan.
One good news is that motorists are free to choose whichever vehicle insurer they want as long as the coverage arranged meets their lenders’ requirements. In other words, they can shop around to find the best deals and avoid overpaying for car insurance.
Then, they need to make sure that the policy they arranged doesn’t lapse because the lender can buy a forced-placed auto insurance once they are notified that the policy is lapsed or some of the coverage required is dropped. Usually, forced-placed policies include both liability and physical damage covers but they are more expensive. The premiums are then added to the loan payments.
Once the loan is fully paid, the vehicle owners can drop the additional coverage required by their lenders and save money. Also, some lienholders may release the owner from the obligation to arrange coverage the way they want when there is not much left to pay on the loan.