Special Insurance Considerations for New Cars

Especially for first time buyers as well as people who haven't bought a new car in awhile, it's good time familiarize yourself with your lender's special insurance requirements. As a driver, you represent a risk to the loan provider; if your car is involved in an accident it will lose most or all of its value. If that happens and then you stop making your payments, the lender has little or no way to recover the money that you owe on the car; they can't repossess your vehicle because the value is gone. Although each lender may differ in their specific requirements, there are a few general rules that most follow when it comes to insurance policies to protect their investment.

• Full Collision Coverage - Lenders always require full collision coverage for any car they write a loan on. This ensures that the car will be completely repaired in the case of an accident, which will ensure that there is no loss in value. Most insurers require that you file proof of insurance with them immediately, or within a specified period of time (30 days or less). Once they receive your proof of coverage, the loan company representative will check the terms of your policy to make sure that they comply with the lender's requirements. Many lenders also require that your vehicle collision policy covers the car up to a certain percentage of its overall value. It's always a good idea to review your loan contract so that you're aware of the exact requirements your lender has so you can purchase the right policy. That way you don't have to go through the trouble of correcting any discrepancies.
• Deductable - The deductable is the amount of money that an insurance policy holder must pay upfront before the insurance coverage is activated. For example, if you're in an accident that causes $4000 to repair, and you have a $500 deductable, you are required to pay the first $500 and the insurance company covers the remaining $3500. A lender's contract will usually set a maximum allowable deductable; this helps make sure that the customer will have enough money to pay the deductable and get the car repaired in case of a collision.
• Gap Insurance - Gap insurance or "totaled insurance" is a common requirement for new car loans, and is almost always a requirement for leased vehicles. It is a special type of policy that covers the "gap" in value between their standard insurance coverage and the value of the policy. Most car insurance polices only cover the vehicle up to its replacement or "depreciated" value. Gap insurance covers the difference between the depreciated value of the vehicle and the amount of the loan. Again, this guarantees that the vehicle's loan is covered up to the full amount owed if the car is involved in an accident and it is deemed to be a total loss.

Remember; the most important thing you can do to guarantee that you have the correct insurance policy to protect both yourself and your lender is to carefully review your loan contract's requirements.