When you fully own your automobile you can consider the question of what car insurance should I get freely. However, lienholders determine the level of insurance coverage you need for a financed auto. Therefore, paying off auto loans can free you from obligation to follow the requirements of the lender and allow you to make auto insurance decisions that can save you money.
It may be a good idea to get car loan if the interest rates are agreeable. It would be nice to buy it outright but it may mean that you have to wait for your dream car until you save enough. Borrowing allows you to buy the things you desire now in return for interest payments. You keep paying the capital and interest until the whole loan is fully paid back.
In time the outstanding amount hopefully will be low enough for you to pay it off. The benefits of paying your borrowings early are discussed in detail in various financial forums and blogs. Simply you don’t have to pay the interest anymore when you can settle the debt early. However, there is another benefit to paying vehicle loans earlier that is economical auto insurance.
What Insurance Is Required when Financing a Car?
Lenders would want the vehicle they finance to be insured properly. Every car must have liability coverage regardless. In addition, lienholders would want Collision and Comprehensive Coverage to make sure it is protected in case of vehicle accidents, theft, vandalism, fire, flood and other weather related damages. Usually, lien holders don’t permit deductible over $500. They will also want GAP Insurance to make sure they are paid in any case.
What is GAP Car Insurance?
When a car is totaled insurers would only pay its open market value, which can go down pretty fast in the early years of purchasing a new vehicle. On the other hand, most loans can be loaded with the arrangement fees and other costs that paying them down would take time. Therefore, there is a high chance that you may not receive as much as the outstanding loan if your automobile is totaled in the early years.
Then, you would have to pay the rest of the loan out of your pocket. Alternatively you would buy GAP insurance to cover the difference between what the insurer would pay and how much is the outstanding debt. Most lenders would require you to buy GAP insurance as part of lending condition.
Is Insurance Cheaper if You Own the Car?
You have a lot more flexibility on which coverage to buy when you own the car loan free. Lenders would be reluctant to drop GAP auto insurance even though the outstanding debt is lower than the car’s open market value and there is no chance of you being upside down on the auto loan. In addition they may not relax the deductible conditions and still require full coverage.
If you were free to choose, you wouldn’t need GAP automobile insurance. There is a chance that you would drop some of the covers as well when automobile isn’t worth much anymore and you own it outright. So, when to drop collision insurance and comprehensive coverage? Many people decide to drop Collision and Comprehensive coverage when the car is worth about $5,000. Also, good drivers with no claim for a few years may choose to have higher deductibles to gain auto insurance savings.
The beauty of owning your automobile outright is that you can make all the above decisions freely. As mentioned before, it may make sense to borrow and buy a new car. However, it may work out better for you to pay off a loan as soon as you can. This way, you avoid paying interest and bring your vehicle insurance premium down.