Many consumers have written in to ask us: is full coverage insurance required on finance cars?
All lenders require that you have full coverage insurance throughout the life of your loan. When you get a loan for a vehicle, the lender is named as the lien holder and will be informed if your insurance lapses. If your coverage lapses, you will either have to pay the loan in full immediately or the lender will buy insurance for you and add it to your loan.
Full coverage insurance is required for auto loans for two main reasons, both of which involve risk aversion. The first is that lenders do not want to needlessly risk that a borrower will stop repaying a loan. If your vehicle becomes inoperable after an accident, you are very likely to stop sending payments. Additionally, if a vehicle is wrecked beyond repair, a lender is without collateral and may demand immediate payment of the loan in full. Without collateral, the only option is to garnish your wages. That leaves the bank at risk for never getting their money and puts you at risk for not being able to pay your other bills with a reduced wage.
Once the loan is paid in full, you have the option to lower your insurance coverage. You will want to evaluate the age of the vehicle and the cost of repairs to determine if liability only insurance will be the right choice for you, at that time.