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

UPDATED: Nov 6, 2020

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Here's what you need to know...

  • Even though every driver must maintain a basic auto insurance policy under state law, other types of additional auto insurance policies are not required by law
  • If you need to finance your vehicle, the lender or finance company may require that you get additional coverage on your vehicle
  • A lender or finance company is able to require you to obtain additional coverage because until you pay off the amount of your loan, the lender is still the owner-of-record of your vehicle
  • Full coverage typically includes collision and comprehensive coverage for your vehicle. These coverages will help pay for damage to your car in a collision, from a storm or due to theft

When you finance a car, you may have certain requirements from the finance company that are above your obligations under state law.

This means that you will likely be required to have full coverage for a car that you have financed. The reason behind this is that until you have paid off the vehicle, the lender still technically owns the car and wants to make sure that its asset is protected.

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What is full coverage for auto insurance?

Full coverage for auto insurance typically consists of comprehensive and collision coverage. Despite the name of this coverage, it does not necessarily mean that it will pay for every aspect of the damage to your car if you file a claim.

Every auto insurance policy is different, but there are certain claims that are typically covered under comprehensive or collision insurance.

Collision insurance helps to cover any physical damage to your vehicle that is sustained in a car accident. Unlike with a basic auto liability policy, even if you are at fault for the auto accident, collision coverage will still cover the claim for damage to your vehicle.

While collision coverage will not cover you for damages as a result of normal wear and tear or for mechanical failure for your vehicle, this coverage does protect you for any damage to your car as a result of a collision.

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Comprehensive coverage protects you from physical damage to your car from an incident other than a collision. For example, if a tree falls and hits your car in a storm, this type of damage would be covered under a comprehensive insurance policy.

In addition, a comprehensive policy will also cover you for damage to your vehicle from theft or vandalism. Flooding and hail damage are also covered under most comprehensive insurance policies.

If you are required to purchase comprehensive and collision auto insurance by the lender when financing a car, then you should ask around for multiple quotes before deciding on an auto insurance company.

If you know in advance that you are going to finance a car, you can talk to your auto insurance company ahead of time to see how the car that you choose will affect the price that you pay for comprehensive and collision coverage.

Along with paying a premium, keep in mind that you will likely have some amount of a deductible for comprehensive and collision auto insurance policies. Your deductible is the amount that you will be required to pay out of pocket before your auto insurance kicks in for a claim under your policy.

In general, if you choose to pay a higher deductible, then you can get a lower rate for your auto insurance premium.

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Why a Lender May Require You to Have Full Coverage Insurance to Finance a Car

It should come as no surprise that you would be required to have auto liability insurance when you purchase a car or finance one. This is because it is required under state law for any driver to register a car and drive legally.

However, you may be surprised to find out that a lender or finance company could require you to buy additional coverage in order to finance a car.

When you finance a vehicle, the lender or finance company is still the actual owner of the asset. If the vehicle you have financed is damaged while you are still paying off the loan, the lender will want to make sure that its asset is secured.

The reason for this is that the lender will need to take the vehicle as collateral in the event that you fail to pay off the loan as required.

The lender understands that the best way to make sure that its asset, your financed car, is protected is to require certain auto insurance coverages as a condition of you taking out a loan. In fact, the requirement for full coverage is likely written into the loan agreement as a condition of you being able to finance the car.

If you decide to drop your full auto insurance coverage at any time during the period that you are paying off the car loan, you will likely be in violation of the loan agreement.

If this is the case, you will be responsible for paying the entire amount of the bill to repair a damaged car if you are still paying off your remaining car loan balance.

In addition, if the lender finds out that you have not maintained the required coverage under the terms of your car loan agreement, it can charge you the cost of a premium as part of your required monthly loan payment.

If you are wondering whether maintaining full auto insurance coverage is a condition of your car loan agreement, you should ask your lender directly when you are taking out the loan.

You likely have the right to purchase full coverage from the auto insurance company of your choice as long as it is registered and licensed to sell auto insurance in your state. Keep in mind that the lender may require that you provide proof of full auto insurance coverage before you drive off the lot with the car.

Recap on the Requirement of Full Coverage Insurance to Finance a Car

You are not required under the law of any state to purchase or maintain full auto insurance coverage on your vehicle.

However, if you need to finance a car, the finance company could make it a condition of your car loan agreement that you maintain full auto insurance coverage during the entire time that the loan is still in repayment.

The financed car is technically an asset of the finance company until the entire amount of the car loan is paid off. Full auto insurance coverage typically consists of comprehensive and collision insurance for your vehicle.

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