If you finance a vehicle through an auto finance company, the car insurance rates you pay may be a little higher because you will be required to maintain full coverage, or comprehensive and collision coverage, insurance on your vehicle the entire time you're making payments to the finance company. Once you have completed making all the payments to the finance company, you can choose a less expensive type of insurance coverage that will reduce your monthly insurance payments.
Why Auto Finance Companies Require Insurance
Almost all car loan lenders, including auto finance companies, require that customers maintain full coverage insurance while making payments on their vehicle. The reason for this is quite simple--the lender wants to be protected in the event that the vehicle is damaged beyond repair or totaled in an accident.
While most people try their best to remain current on their car payments, this is not always the case when the customer is not able to drive a vehicle. If the vehicle is involved in a serious accident, and the driver no longer is able to use the vehicle, many people simply stop making payments to the car loan lender. This is not merely a presumption but a fact that is well borne out by reports and statistics from a wide variety of sources.
Since it is a well-known fact that many people do not pay for vehicles they cannot drive, the auto finance company needs to protect itself from loss of investment by requiring full coverage insurance. In the event that the vehicle is totaled, the insurance company will pay the adjusted market value of the vehicle directly to the lender--in this case the auto finance company. While the amount paid by the insurance company may not fully satisfy the car loan, it does ensure that the lender will receive something.
If the vehicle is involved in a major accident, and the insurance company totals the vehicle, the customer will be responsible for paying any balance that remains after the auto finance company receives payment from the insurance company. In short, if the insurance company does not pay off the loan--the customer is responsible for paying the difference.
Why You Don't Want to Cancel Your Car Insurance
Some people are under the mistaken assumption that they can get away with canceling their full coverage insurance while making payments on their vehicle. While this may have been possible years ago, many insurance companies now reports policy cancellations directly to both the State Department of Motor Vehicles and the car loan lender. In fact, many major insurance companies, such as Hartford Insurance and Progressive Insurance are well known for reporting lapses in coverage and policy cancellations to banks and auto finance companies.
Once the auto finance company has been made aware of the policy cancellation, the auto finance company will usually purchase a policy that protects their investment, but does not offer enough protection to meet the legal requirements in most states. The auto finance company will also pass the cost of the coverage along to you and it will certainly be a lot more than the amount you have to pay for full coverage insurance. So, it is always cheaper to maintain the coverage with an insurance company rather than letting the auto finance company set an insurance rate for you.