What Happens if You Don’t Have Full Coverage on a Financed Car?

If you fail to carry full coverage on a financed car, your lender can buy it for you, or they could even repossess the vehicle.
Written by R.E. Fulton
Reviewed by Jessica Barrett
When you finance a car, your lender will typically require you to carry
full coverage auto insurance
, which includes liability, collision, and comprehensive coverage. If you don’t carry the required
car insurance
, your lender could purchase it for you or you could even lose your vehicle.

Your lender might take action if you don’t carry full coverage

Dealerships and banks that offer auto loans typically require borrowers to carry full coverage insurance on financed vehicles as a way to protect their investments. A full coverage insurance policy typically includes:
  • State required coverage: Typically
    liability coverage
    , which covers property damages and bodily injuries to other parties after a car accident that you cause. May also include
    , or
    uninsured/underinsured motorist coverage
    . PIP sometimes requires a deductible.
  • Collision coverage
    : Covers damages to your vehicle after an accident, regardless of fault. Typically requires a deductible.
  • Comprehensive coverage
    : Covers damages to your vehicle due to theft, vandalism, natural disasters, falling objects, or hitting an animal. Typically requires a deductible.
As part of your lending requirements, you may need to raise your bodily injury liability limits to $100,000 per person and $300,000 per accident. Your lender may also require you to carry the following types of insurance: 
  • Gap insurance
    : Pays the difference between the actual cash value (ACV) of your car (minus the deductible) and what’s left on your loan 
  • Mechanical breakdown insurance (MB)
    : Helps pay for repairs due to trouble with the engine, drivetrain, electrical system, transmission, etc
Without full coverage, either you or the lender would have to pay out-of-pocket for the necessary repairs—or, if the car were declared a total loss, to replace it entirely. 

The lienholder could purchase a full coverage policy on your behalf

If you purchase car insurance coverage that doesn’t meet your lender’s insurance requirements, the most likely outcome is that they will purchase full coverage car insurance for the vehicle, and then add the cost to your car payments. 
This is known as force-placed auto insurance coverage and it usually comes with much higher car insurance rates than if you bought the coverage yourself.
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Your lender could cancel your loan

Although it’s more likely that your lender will take out force-placed insurance on your behalf, they will have legal standing to cancel your loan if you don’t carry the required coverage on your financed car. 
If that happens, your vehicle could be seized and your credit score could take a major hit. 

You could be under-protected if your car is damaged

Even if your lender didn’t take any action based on your insurance status, carrying only your state’s minimum liability insurance—or
driving uninsured
—leaves you seriously vulnerable if you get into an accident or the car is otherwise damaged.
According to the Insurance Information Institute, the average collision insurance claim in 2022 was $5,992 and the average comprehensive claim was $2,738.  So if your vehicle was damaged and you didn’t have full coverage, you could face thousands of dollars in vehicle repairs.


What happens if I don’t get full coverage? 

If you don’t have full coverage on your vehicle, you’ll have to pay to repair or replace it yourself if it’s damaged. Also, if your car is financed, your lender might purchase force-placed insurance for you, or they could even repossess your car.

Why does a financed car have to be fully insured?

You need full coverage on a financed vehicle because it helps cover a wide range of damages—so paying to repair or replace your car won’t fall on you or the lender to handle out-of-pocket.

What does full coverage mean on a financed car?

Full coverage typically means liability insurance, collision insurance, and comprehensive insurance, although some lenders will also require you to carry gap coverage and/or mechanical breakdown insurance (MBI).

What is the difference between a financed car and a car that is paid off?

A financed car is one that you are currently making auto loan or lease payments on. Once you completely satisfy your loan requirements, you have a paid-off car.

What is the cost of full coverage on a financed car?

The cost of a full coverage auto insurance policy varies widely, depending on factors like your driving record, your age, where you live, the car you drive, your coverage limits, the insurance provider you choose, and more.

Can I drop full coverage on a paid-off car?

Yes, if you’re not required to carry full coverage by a lender, you can drop it from your car insurance policy. But it may be a smarter investment to keep full coverage in case of an accident—especially if it’s still a relatively new car with a high value.

How do I get rid of force-placed insurance?

If you purchase insurance that meets your lender’s requirements, you can send them proof of coverage and they should remove the force-placed insurance. 

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