Insurance Coverage Requirements for Auto Loans

Before shopping for auto loans it is important to understand the insurance coverage requirements. Because comprehensive and collision are required coverage for any vehicle purchased or leased with an auto loan, it is another expense that should be factored in before deciding which vehicle to purchase. Consider the fact that different makes and models also have different base insurance rates, to help determine how much vehicle you can afford.

Comprehensive and Collision Auto Insurance

This is known as "full coverage" auto insurance and will be required on any vehicle that you do not own, until the loan is paid off and the lien is removed. Then, you will be able to downgrade your insurance to the state minimum if you choose to do so. Comprehensive and Collision will cover anything cosmetic that happens to the vehicle as a result of a wreck and may cover some acts of God. The insurance coverage will not cover any mechanical damage to the car.  In some cases, it will cover the cost of towing and a rental car while repairs are being made, but these are additional features you can choose to purchase. The amount of coverage will have to be enough to completely replace the vehicle should it be totaled for any reason. When you purchase insurance coverage, you will be given a choice of deductibles, which is how much you will pay out of pocket before the insurance company will pay the rest of the bill. Generally, most lenders allow for a $500 deductible to help keep your premiums low, but you may choose to have a lower deductible or no deductible at all if you are willing to pay a higher premium. This coverage will also cover damage to another person's vehicle if you are in a wreck that is deemed your fault.

GAP Insurance

Though not always a requirement, some auto financing companies may require that you purchase GAP insurance. This kind of insurance is generally around $500 per policy and is worked into the amount financed, which means you will pay for it over the course of your vehicle payments. In the event your vehicle is totaled and your insurance company pays less for your car than what you owe on the loan, the GAP insurance comes in and pays the difference, so the loan for the car is completely paid off and you are not stuck paying on a loan for a car you no longer own, just to keep your credit from going down the tubes. Though most don't plan on having their cars get totaled, it does happen--and being upside down in a car loan, owing more than the vehicle is worth, happens a lot because of the high depreciation rate on cars.

Understanding the insurance coverage requirements when it comes to purchasing a new or used vehicle that requires a loan before you begin shopping is something that will make the car shopping process a little easier for you. Talk to insurance companies beforehand to get a ball park estimate of what you'll have to pay, but prepare for that to change based on the make and model you end up buying.

 


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