What If I Don’t Keep Full Coverage Insurance on a Financed Car?

Normally, lenders require full coverage auto insurance as part of the loan contract. They put down most of the money when you purchase the car and technically, they still own it until the loan is fully paid. Lenders are also listed on your policy’s declaration page as “loss payee”, which means they are entitled to claim payments if something happens to the vehicle. So, your Collision and Comprehensive coverage will pay for repairs or replacement in case your car is involved in an accident, gets stolen or suffers other damages like fire or acts of nature. Although there may be other consequences, the most serious problem you would have when you cancel Collision and Comprehensive coverage is that you will have no insurance and have to pay the remainder of the auto loan out of pocket if your car is stolen or beyond repair after an accident.

You are exposed when you drop full coverage when your vehicle still has decent value and you don’t have the means to get it repaired or replace it, if it gets damaged, totaled or stolen, regardless of having a loan on it or not but you need to answer to the bank if you do.

If you dropped your coverage completely or dropped some of the coverage required by the lienholder, your insurer would normally inform your lender since their interest is noted on the policy. Also, most companies may require you to send them a copy of the policy at each renewal and start enquiring if it isn’t coming. Upon learning you dropped the required coverage, the bank or finance company may take the following actions;

  1. Normally, they would serve you a 30 – 45 days notice requiring you to reinstate the vehicle insurance coverage.
  2. If you don’t comply, they can buy force placed insurance for the car and add the premiums onto your loan payments. Force placed insurance is usually expensive and may only have physical damages coverage. These policies are designed to protect the bank and not necessarily concerned with the liability coverage required by states to be able to drive the car legally. If you reinstate or buy a new policy complying with your lender’s insurance requirements, your lender is often required to accept it and stop the forced placed insurance.
  3. If you aren’t paying the premiums or your loan payments, they may choose to repossess the car and this process varies depending on the company and state rules. Even if they repossess the car, your loan responsibilities don’t end there. They can sell the vehicle at an auction and demand the rest of the money from you if it doesn’t cover your loan.

Repossessions and debt judgements against you will have significant effects on your credit score.

Auto insurance is a means of protecting the vehicle from certain damages, providing bodily injury and property damage coverage for third parties, complying with minimum requirements of your state and often used to facilitate loans. The finance company relies on the insurance to pay for damages to the vehicle and keep it as a viable asset for the underlying loan. That is why it is very important to keep it in force.

However, if you have already paid the loan down significantly so you won’t have problem paying it off even if the vehicle is totally lost, you may not want to spend the extra premium for full coverage. In such cases, you may contact your lender and see if they would allow you to drop Collision and Comprehensive coverage. Some lenders may release you from part of your contract in such cases.

Nevertheless, you still need to maintain at least minimum liability only vehicle insurance if you are still driving it. This is a state requirement and has nothing to do with having a loan or not.

To avoid these consequences, it’s important to review the terms of your loan agreement and maintain the required full coverage automobile insurance throughout the loan duration. If you’re facing financial issues and having difficulties paying for the premiums, you should contact your lender to explore potential solutions. You may be able to adjust the terms of the loan or refinance it.