Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insuran...

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager Chris Harrigan

UPDATED: Aug 10, 2021

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Key takeaways...

  • By law, vehicle owners must buy a minimum amount of third-party insurance to legally drive, tow, or park their cars
  • State officials mandate that owners must have third-party insurance but not first-party coverage on the insured vehicle
  • If the car is being financed or it’s being leased, the lender or lessor requires you to buy full coverage
  • Buying comprehensive and collision is necessary so that you can pay to repair the collateral on the contract
  • If you don’t have full coverage insurance, the lender may force-place insurance on your car or repossess it

Lenders don’t give you thousands of dollars to buy a car without setting some ground rules. To borrow money, you have to not only agree to pay the lender interest, but you also have to agree with the terms and conditions of the loan contract itself. You agree to keep your car fully insured at a certain level. Generally speaking, you need collision and comprehensive coverages with a $500 deductible or less on each.

If you don’t comply with any of the terms of the loan, your car could be impounded, meaning, it will be repossessed and towed away. Failing to comply with the terms of your auto loan will put you in default. So yes, it can technically be repossessed if you don’t have the proper insurance coverage.

While there are a number of ways that you can be in default, two of the most popular reasons that cars are repossessed today is because you don’t make your payments on time and because you have failed to carry car insurance.

To get your vehicle back after repossession, you will have to pay your late payments as well as any repossession costs.

If you have a car loan without insurance, get the best rates now.Enter your zip code above to compare car insurance rates from top companies in your area.

What does it mean when your bank signs you up for insurance?

As an alternative to repossessing your car (which requires money and a lot of paperwork), your insurance company may simply choose an insurance plan for you. If you do not make the full payments with the added insurance costs, they would then start the repossession process. The monthly premiums are often added into your car payment to make sure you are responsible for it.

As you might guess, your financing company won’t run the numbers and get quotes from insurance companies to find the cheapest insurance rate. They may not even choose the best coverage for your money. As long as it meets certain standards, they’ll sign you up. You’d have to find your own plan to get around this, and it would cost you even more with this on your driving record.

What you need to know is that failing to make payments is the leading cause of default, but it’s not the only way that you can land your loan in default.

In fact, with most lenders, you must be more than 90 days late paying your car note to be in default or you’re only considered delinquent. So, if you have standard car insurance and you’re two months late paying your bill, you’re not technically in default for another month.

Not only can your car be repossessed, but your car insurance will go up if you have a lapse in coverage.

Percent Increase After Car Insurance Coverage Lapse
Company% Increase in SC after a lapse in car insurance coverage% Increase in CA after a lapse in car insurance coverage% Increase in FL after a lapse in car insurance coverage
Liberty Mutualn/a16.38%n/a
Farmersn/a in SC11.90%6.89%
Nationwideno quote offered13.10%n/a in FL
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The amount your rates will go up depends on where you live and which insurer you have. Regardless, you’re definitely going to see an increase in your rates.

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Are voluntary repossessions better for your credit if you can’t make payment?

The Federal Trade Commission’s Consumer Information Division provides resources to help you get information you need on auto insurance, lenders, and more. Whenever you get a car loan, you should always make sure the monthly payments for insurance are also within your budget. The lender has rights to the property until you make that last payment, and so they are legally able to repossess your vehicle.

Though their rates vary by state, the right to repossess is generally included if the buyer goes into default or fails to fulfill the terms of the arrangement, such as carrying full coverage. Sometimes, buyers jump ahead and go into voluntary repossession. This means they surrender their personal property (i.e. the car) ahead of time, typically when they’ve already fallen behind on payments on a purchase or lease.

This can get creditors off your back. It still hits your credit pretty hard. So do not make this kind of decision lightly.

What happens if you default and the lender seizes your car?

FindLaw notes that your lender may seize the vehicle and possibly sell it to recoup their investment.

Here are some other things that will land you in default:

  • Selling the collateral on the loan without the lender’s permission
  • Leaving the country with the vehicle
  • You relocate and don’t tell the lender where the property is located
  • You don’t do regular maintenance or repair the car when it’s damaged
  • You don’t maintain full coverage on the vehicle

Any of these are valid reasons for the dealer repossessing your vehicle. If the lender has to seize your car after going through the legal process of repossession, it means they gave you multiple notices to resume loan payments or conform to the agreed upon rules, and you didn’t. So the effect on your credit score is much greater. This may make it hard to get a car or find financing in the future.

What happens when you default on a car loan?

When you’re officially in default with your lender, the lender has the right to thier owned property. A lender can lawfully seize a car, and it won’t be long before your car insurance company knows your car has been repossessed.

In some cases, the loan can be taken out of default when the borrower catches up their payments and pays certain fees.

If you can’t make arrangements with the creditor or you try to dodge the issue, the company will send a company to come and seize the vehicle.

This video from 850 Club Credit Consultation, LLC discusses some of your options after your car is repossessed.

In most states, a finance company can repossess a car without notice as soon as the car loan is in default for a valid reason. As long as the creditor doesn’t threaten you, use force, or enter a locked garage, they are within the rights to take the car back.

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What kind of car insurance do you need to finance a car?

It’s always good to know how much insurance you’re required to have when you enter into a loan agreement. Since you’re financing the purchase of property, one of the terms of the loan will be that you buy property insurance.

Unfortunately, you can’t get away with buying a very limited policy if you want to avoid defaulting on your loan.

All financial institutions require their borrowers to maintain full coverage on the financed car. A full coverage insurance policy is needed to protect the collateral on the loan if it were ever damaged in an accident.

It also ensures that the car can be repaired if it’s vandalized and that the loan can be paid off if it’s stolen. Here are the coverage requirements for financed cars:

  • Comprehensive pays to repair or replace the car if it’s damaged in a fire, a storm, a flood, or during an act of vandalism
  • Collision How does collision car insurance work? It pays to repair the car if it’s damaged in a collision.

If you have liability, comprehensive, and collision, that’s generally considered full coverage.

What kind of car insurance do you need to lease a car?

If you’ve entered a lease contract instead of financing, you’re still at risk of having the leased car taken away. You must comply with even stricter insurance rules when you have entered a lease agreement.

Not only do you have to carry full coverage, but the lessee also requires you to carry high limits of liability. Here are some common lease agreement requirements:

  • Comprehensive to pay for non-moving losses to the leased vehicle
  • Collision to pay for damage sustained to the vehicle when the leased car is being operated
  • Bodily Injury must carry at least $100,000 per person, $300,000 per accident in coverage to pay for third-party medical bills
  • Property Damage must carry at least $100,000 in coverage to pay for third-party repairs
  • GAP must carry Guaranteed Auto Protection to pay off your loan when the car is totaled

Bodily injury and property damage are part of liability coverage. The main difference here is that you also need GAP car insurance.

What kind of car insurance do you need if you have a car loan?

The state says that you must carry third-party liability coverage. Here are those minimums compiled by the Insurance Information Institute, regardless of whether you are financing or outright own your car.

Minimum Liability Coverage Required by Law per State
StateInsurance required Minimum liability coverage limits
ALBI & PD Liab25/50/25
AKBI & PD Liab50/100/25
AZBI & PD Liab15/30/10
ARBI & PD Liab, PIP25/50/25
CABI & PD Liab15/30/5
COBI & PD Liab25/50/15
CTBI & PD Liab, UM, UIM25/50/20
DEBI & PD Liab, PIP25/50/10
DCBI & PD Liab, UM25/50/10
FLPD Liab, PIP10/20/10
GABI & PD Liab25/50/25
HIBI & PD Liab, PIP20/40/10
IDBI & PD Liab25/50/15
ILBI & PD Liab, UM, UIM25/50/20
INBI & PD Liab25/50/25
IABI & PD Liab20/40/15
KSBI & PD Liab, PIP25/50/25
KYBI & PD Liab, PIP, UM, UIM25/50/25
LABI & PD Liab15/30/25
MEBI & PD Liab, UM, UIM, Medpay50/100/25
MDBI & PD Liab, PIP, UM, UIM30/60/15
MABI & PD Liab, PIP20/40/5
MIBI & PD Liab, PIP20/40/10
MNBI & PD Liab, PIP, UM, UIM30/60/10
MSBI & PD Liab25/50/25
MOBI & PD Liab, UM25/50/25
MTBI & PD Liab25/50/20
NEBI & PD Liab, UM, UIM25/50/25
NVBI & PD Liab25/50/20
NHFR only25/50/25
NJBI & PD Liab, PIP, UM, UIM15/30/5
NMBI & PD Liab25/50/10
NYBI & PD Liab, PIP, UM, UIM25/50/10
NCBI & PD Liab, UM, UIM30/60/25
NDBI & PD Liab, PIP, UM, UIM25/50/25
OHBI & PD Liab25/50/25
OKBI & PD Liab25/50/25
ORBI & PD Liab, PIP, UM, UIM25/50/20
PABI & PD Liab, PIP15/30/5
RIBI & PD Liab25/50/25
SCBI & PD Liab, UM, UIM25/50/25
SDBI & PD Liab, UM, UIM25/50/25
TNBI & PD Liab25/50/15
TXBI & PD Liab, PIP30/60/25
UTBI & PD Liab, PIP25/65/15
VTBI & PD Liab, UM, UIM25/50/10
VABI & PD Liab, UM, UIM25/50/20
WABI & PD Liab25/50/10
WVBI & PD Liab, UM, UIM25/50/25
WIBI & PD Liab, UM, Medpay25/50/10
WYBI & PD Liab25/50/20
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The numbers here refer to the amount for each type of coverage. So, 30/60/15 refers to: $30,000 for bodily injury per person, $60,000 for total bodily injury per accident, and $15,000 for property damage.

But you’ll need more than just liability. You’ll need comprehensive car insurance and collision coverage too.

This video from Erie Insurance explains this added coverage.

Unfortunately, if you carry a basic policy you won’t be in compliance with the terms of your contract.

Some people assume having insurance is enough to satisfy everyone, but your auto lender is more concerned with coverage on the car and not mandatory coverage.

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What is force-placed car insurance?

What happens if you don’t have a full coverage auto insurance policy on a financed car and what happens if you drop insurance on a financed car? If you don’t have adequate insurance (full coverage) on a financed car, your loan lender might purchase force-placed insurance.

Larger lenders may not repossess a car for no insurance but they will force-place insurance. This means that they will add a charge for special lender insurance that only protects the finance company and not you as the borrower.

There are smaller lenders that will seize cars that don’t have insurance. It’s more common right after the vehicle is financed.

Frequently Asked Questions

We’ve added a few more FAQs about repossessed vehicles and car insurance below.

What do you do if you can’t afford car insurance?

You’ve read that a financed car can be repossessed because of no insurance, but what if you can’t afford that car insurance coverage?

Most insurers provide some kind of discounts, but they do vary by insurer. So, it’s best to shop around and see what kind of discounts you can get. Not only that but credit scores and driving record also county more for some car insurance companies than others.

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What happens to your car insurance on a repossessed vehicle?

If you try to make a repossessed car insurance claim, you won’t be successful. When you enter into an agreement with your lender, you agree to their terms. That means they get to take full possession of the value of your vehicle if you don’t pay them back. That means that they might be able to make a claim to your insurer for damages, but you can’t get compensated for it.

What happens when a damaged car is repossessed? That’s when your lender will possibly make a claim to your insurance company to pay for damages.

How much does it cost to repossess a car?

The repossession of cars is a whole business, and you’ll have to pay for it to get your car back. Memphis Bankruptcy Lawyer notes that you’ll have to pay about $300 to $400 in repossession fees plus wait between one week and a few months before you can get your vehicle back.

This is in addition to either paying enough to make the loan current or paying off the loan entirely. It depends on your state and the terms of the loan, which may include reinstatement or redemption options.

If you want to avoid getting your car seized, shop around for insurance now. If you need to get cheap car insurance on your financed vehicle, enter your ZIP code below to find car insurance rates that work for you!