When buying any car, there are always going to be associated costs — one of which is car insurance. There are multiple factors that impact the cost of coverage, but for this article we’ll focus on financing. Getting a loan for a car can happen before you buy or after you own.
Car loans can be obtained from lenders such as:
- Credit unions
- Car dealerships
- Independent lenders
No matter where you get your loan, having one will likely impact the cost of your car insurance. In this article, you will learn why.
Situations in Which Full Coverage May Be Required
When you get a car loan, the lender will want the vehicle insured just as much as you do. After all, they own the car. Because of this, most will require you to purchase full-coverage insurance, including collision and comprehensive. This makes them a “loss payee” — a person or entity that is entitled to the insurance payout in the event of an accident.
Adopting this model is somewhat universal among lenders for cars, meaning you’re likely going to see higher insurance costs when financing.
For example, let’s say you want to trade in the car you own outright for something a little newer, when you find just what you’re looking for at an area dealership. However, when the dealer appraises your car, they determine it to be less valuable than you would have hoped for, thus making the new car out of reach. You decide to finance the remainder, but the financing company requires full coverage — something you didn’t have before with your previous car.
It’s important to note that in this situation, your car insurance rates would likely increase even more because the newer vehicle carries more value.
How to Get a Loan After the Purchase
Say you buy a car with cash but begin to fall behind on your bills. There are plenty of lenders out there that will grant you a car loan after you’ve purchased a vehicle, but usually with the requirement that you obtain full-coverage car insurance. Remember this before you meet with your lender, as getting a personal loan could be a workaround — especially if the car in question is a fair-weather classic.
For example, let’s say you find your dream muscle car, a true antique. You don’t have enough cash to meet the seller’s asking price, so you head to the bank for an auto loan. Even though the car is older and will likely spend most of its time tucked away in a garage or shop, the industry standard for auto loans is to require full-coverage insurance, thus requiring you to spend more on your premiums.
However, if you qualify for a personal loan, you can circumvent the full-coverage requirement if you’re okay with the financial risk of liability only.
The best way to determine if financing a car will affect your car insurance rates is to assume that whatever lender you work with for the loan will require you to carry full coverage. Knowing this can help you get a better handle on your monthly expenses.