Lender-placed auto insurance, or force-placed insurance, is a policy that’s given to you by a lender if your mandatory full coverage car insurance lapses or doesn't cover the entire value of your vehicle. You don't typically have to worry about this unless something happens to your current auto insurance and you end up on the receiving end of one of these policies.
Force-Placed Auto Insurance
When you're financing a car, you're required to have full coverage auto insurance which carries a high-enough premium to cover the value of the vehicle. You're required to do this because lenders want to protect their asset – you don't technically own the car until you make the last payment and have the lender's name removed from the title.
The difference between lender-placed insurance and a policy that you choose mainly comes down to cost. When you need auto insurance, you're able to shop different insurance providers to get the coverage that makes sense for you (as long as it meets the lender’s minimum requirements) at the lowest cost you can find.
A lender's force-placed insurance policy is likely to be more expensive than one you get for yourself. They're not going to shop around and get something that fits nicely into your budget.
Instead, they take a standard full coverage policy that gives them the most protection against loss or damage, no matter the cost to you. That cost then gets tacked on to your monthly car loan payment, and not paying for it can result in loan default and likely a subsequent vehicle repossession down the line.
Avoiding Lender-Placed Car Insurance
In order to avoid having a lender stick you with the insurance policy they want, make sure that you fulfill all your auto loan obligations when it comes to car insurance. This means choosing a policy that includes enough coverage for the value of your vehicle, and not letting your policy lapse.
A lapse in coverage, even for just one month, can result in force-placed insurance. Your insurance company is obligated to tell your lender if you've let your coverage lapse because, as a lienholder on your title, the lender is listed as the first owner on the car.
Shopping for Auto Insurance
There's no universal "full coverage" policy in the U.S., but one that combines some form of both comprehensive and collision insurance is usually considered full coverage. To get the most out of your auto insurance coverage, you typically have to carry a policy which could include:
- Collision insurance – Covers damages that occur from a car accident involving two vehicles, whether you're at fault or not.
- Comprehensive insurance – Covers damage from non-car collisions, such as animals, falling tree limbs, hail or wind, and theft.
- Liability insurance – This is sometimes referred to as personal liability/property damage. It covers medical bills for people injured in an auto accident where you're at fault, and also covers property damage that occurs in an accident.
- Uninsured/Underinsured motorist – This covers you if you're in a collision with a driver who isn't insured, or who doesn't carry enough coverage for the amount of damage done to your vehicle.
Armed with this knowledge, you can start shopping for the right insurance coverage for your situation and budget. Remember, you don’t have to stay with the same insurance company the whole time you own your car. You can switch providers as often as you like (typically with no penalties), as long as there’s no lapse in your auto insurance coverage.
Now that you know how to avoid having a lender-placed car insurance policy forced on you, it could be time to look at your budget. If your vehicle's full-coverage insurance has your budget stretched too thin, getting a more affordable used car could cut down on that cost, and we can help you find one that fits your situation.
Need a Car to Insure?
Budgeting for an auto loan becomes even more important when your credit is suffering. In order to get the most bang for your buck, you probably want to shop around for not only your insurance policy, but also the vehicle that it insures. The amount of coverage you need depends on your car’s value, so take the time to weigh your options. If you need a more affordable ride, let us point you in the right direction.
At CarsDirect, we work with a nationwide network of special finance dealerships that are signed up with lenders for many types of credit challenges. Avoid the hassle of driving around town searching for your next vehicle by filling out our fast and free auto loan request form. After you do, we'll get to work matching you with a dealer near you!
