Car insurance requirements for a car loan or lease

Chris Kissell

Chances are good the next car you buy or lease will involve financing. Buying or leasing a car with cash is out of the question for most folks, so they have to secure a loan before driving away in that sweet new ride. 

But taking money from a lender may require you to buy more car insurance than you had planned. For example, at Wells Fargo, "our coverage requirement as a lender is usually more than state minimums," bank spokeswoman Natalie Brown says. 

"Because the vehicle is the collateral securing the loan, we need to protect our interest in it," she says.

Collision and comprehensive

In most states, you must purchase state-mandated minimum levels of car insurance by law. However, these minimums apply only to basic liability insurance. That's the type of insurance that covers damages you cause to someone else, including wrecking other cars and property, or seriously injuring or even killing drivers, passengers and pedestrians. 

The two types of insurance coverages that pay for damages to your car – collision and comprehensive – are optional.

Collision insurance pays for damages to your car resulting from crashes with other cars or objects, such as a telephone pole. Comprehensive insurance covers damage that does not fall under collision. Damage from flooding, hailstorms, fire and animals are examples of losses covered under this part of your policy.

Drivers of newer cars generally buy both collision and comprehensive. And that’s wise, says Sandra Spann, spokeswoman for American Family Insurance.

"Customers that have newer vehicles, or vehicles that are worth more than they are able to afford to replace, should carry comprehensive and collision," she says. 

However, some drivers skip these types of coverage – particularly on older cars – because doing so can shave hundreds of dollars off car insurance premiums

Protecting their investment – and yours

Skipping collision and comprehensive coverage typically isn’t an option if you’re financing your new vehicle through a loan or lease. Most lenders insist that you purchase these coverages.  

Brown says the reason for this requirement is simple. 

“We would want the insurance to cover the cost of replacing or repairing the customer’s vehicle in the event of an accident or theft,” Brown says. 

In a statement to CarInsuranceQuotes.com, the Consumer Bankers Association says that “lenders’ requirements and procedures vary greatly” for auto loans and leases, but adds that most require comprehensive and collision coverage with deductibles of no more than $1,000.

Brown says Wells Fargo borrowers generally can decide for themselves what other types of optional car insurance to buy. 

"Outside of the requirement to maintain comprehensive and collision coverage, customers are free to tailor their coverage in any way to meet their financial needs," Brown says. 

Eliminating the gap

If you’re planning to secure a loan or lease, gap insurance is another optional car coverage you may want to purchase. 

A new car typically begins to lose value the minute you drive it off the dealer’s lot. In fact, experts say, a new car loses up to 30 percent of its value in the first year. 

That unfortunate fact can create a big financial headache if you get into a major accident within the first couple of years of your loan or lease. 

For example, imagine you buy a $20,000 car and its totaled one year later in a crash. If you maintain collision insurance, your insurer will pay you the car’s actual cash value – the amount the car is worth after depreciation -- which could be as little as $14,000. 

Suddenly, you owe the lender out of pocket for the gap between what you have paid for the car – in terms of the down payment and car payments – and what it now is worth.

Gap insurance covers that space, Liberty Mutual spokesman Glenn Greenberg says. “Gap insurance will pay the difference between the actual cash value of the vehicle and the current outstanding balance on your loan or lease,” Greenberg says. 

Although many dealerships offer gap coverage, it usually is less expensive to buy through a car insurance company. If you’re leasing a car, gap insurance often is included in your leasing contract, but check with your leasing company to be sure. 

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