When you finance a vehicle, all lenders do require that you carry full coverage insurance for the duration of the loan. The reason is simple: if the vehicle is totaled in an accident, they want you to have the funds to pay off your loan. Otherwise, they will take an enormous loss on the investment. If you allow your coverage to lapse, it is typically within the legal rights of the lender to repossess the vehicle. If they do so, not only will your credit take an enormous hit, but you could be on the hook for any loan balance that remains after the lender sells the vehicle at auction.
The Alternative: Lender-Purchased Coverage
Having said that, lenders do not make money on repossessed vehicles. To avoid repossessing a vehicle, a lender may purchase insurance for you and add the cost of the premiums to your loan balance. If the lender is forced to do that, you will have to pay interest on the insurance premium. Once your lender has purchased insurance for you, you may not have the option of starting your own coverage again and be forced to continue to pay interest on the insurance the lender purchases throughout the life of the loan. Insurance is expensive enough these days–you certainly don’t want to have to pay interest on it!
It is in your best interest to shop around for the least expensive policy available that meets your state’s and lender’s insurance guidelines. There are several online services that can help you shop quickly, but the top online insurance providers include, Geico, Esurance, and Progressive. Given the high number of uninsured drivers these days, including uninsured motorist coverage (UM) is often a good idea. Check with your lender or dealer to determine if this coverage is mandatory under your finance agreement.