If you bought your car on financing, then your car insurance won't be the same as it would be if you bought the car on cash. Below are some of the ways in which car financing affects your auto insurance.
Auto insurance comes in three basic forms — liability, collision, and comprehensive coverage. Liability coverage is a government requirement, so you should always have it if you intend to drive. Collision coverage is an optional coverage that protects you in case your car collides with another car or object. Comprehensive coverage is also an optional coverage — it protects you from accidents other than collisions.
Your lender has a financial interest in your car. The lender can repossess your car to recover their loan if you default in your payments. The recovery won't be possible if you lose your car or something totally damages the car. Lenders typically require comprehensive and collision coverage to protect themselves from such situations.
Your lender may force insurance coverage on your car if you fail to maintain comprehensive or collision coverage. The insurance industry refers to this form of insurance as lender-placed insurance or collateral protection insurance. The lender will do this simply by adding the costs of lender-placed insurance on top of your outstanding loan amount. Lender-placed insurance is relatively costlier than conventional insurance. So, it's best if you buy coverage before the lender imposes theirs.
If you bought your car on a loan, there might come a time when the value of the car is lower than the outstanding loan on the car. If someone steals your car or something totally damages the car, then you have to top up the gap between the value of the car and the outstanding loan using your own money.
Gap insurance coverage can help you bridge that gap. Although gap insurance is not mandatory, you should have it if the gap between the loan and the value of the car is huge.
Lender Inclusion in Policy
Lastly, you will have to include your lender in your insurance policy as a loss payee. The inclusion means your lender gets notifications on any changes you may make to your auto insurance coverage. For example, the lender will know if you reduce, increase, or cancel your coverage. The inclusion also entitles your insurance company to the compensation that you may receive if you lose your car in a case of theft or accident.
To learn more about the differences of buying a car on financing, contact a company like Angel Auto Insurance in your area.