Is Car Insurance More Expensive When You Finance?

It is possible to wonder if an auto loan will affect your insurance costs. Yes, it does. But not in the way you think. Having an auto loan usually doesn’t make the insurance company charge you more for the same policy.

What a loan does is add additional coverage requirements to your policy — mainly collision and comprehensive — so the financial institution your loan is through covers its investment. Your lender is co-owner if you finance all or part the vehicle’s costs.

Is car insurance cheaper if you own the car and don’t finance? You can reduce your coverage up to the minimum in your state. Let’s look at it more closely.

Are lenders required to provide insurance coverage for a car financed?

All states, except New Hampshire, require a minimum amount of coverage for registered vehicles. This coverage usually includes liability and medical coverage. Liability covers the driver of another car for claims. It also covers property damage and medical expenses. Your vehicle’s medical coverage will protect you and your guests.

While your state may not require collision and comprehensive coverage, your finance company will.

Car financing requires insurance

Because the state doesn’t provide coverage for cars that are financed, your lender will require you to have insurance. This is because it won’t cover the damage caused by an accident. Your lender wants to make sure the vehicle is insured.

What is collision and comprehensive insurance?

  • Collision insurance will pay for damage to your car in an accident, no matter who is at fault. The coverage is limited to damage to the vehicle while it is moving, such as an accident with another vehicle or a collision with a light pole.
  • Comprehensive coverage pays for damage to your car for instances like weather disasters, fire or hitting an animal. Many policies cover chipped windshields without a deductible.

A deductible is a cost that you pay before your collision or comprehensive coverage kicks in. This deductible can be chosen when you buy your policy. The deductible is the amount that you pay before your coverage begins. It can range from $50 to $2,000 and more.

Rates influenced by a loan

You will pay more for collision and comprehensive coverage. Collision is usually more expensive than comprehensive, but together they can increase your policy costs by several hundred dollars a year.

Your rate will be affected by the addition of comprehensive and collision coverage as required by your lender. Check with your lender before you buy the car to make sure there are no additional requirements.

Reduced coverage during non-use months

You may be able to reduce your insurance premiums if you only use the car during certain times of the year. Let’s suppose you purchase a small truck that has good traction to be used in the winter.

You may be able to get limited coverage from your lender that covers only the months the truck is stored. It may be necessary to keep your truck in a garage, or another covered location.

If your lender is willing to reduce your coverage, you should call your insurance company and inform them that you won’t be driving the truck in the summer. This is a little more work, but it could save you hundreds of bucks if your lender permits.

What happens if your policy is cancelled?

You might have considered letting your insurance expire by not paying your premiums. Particularly if you finance your car. Your lender was named as loss payee and additional insured when you purchased the car. This designation appears on the car’s title. It is also known to your DMV or your insurer.

This means that your lender will discover if your insurance is lapsed. Your lender will be in trouble if your vehicle is not insured. The lender may ask you to repay the loan by repossessing your car or increasing your monthly payment to cover your vehicle.

Let’s suppose you find yourself in a temporary financial bind and are unable to pay your premium. In that case, you will be charged late fees or have coverage changed. Although you may be granted a grace period in the event of a missed payment, don’t expect anything more.

How to save money when buying car insurance

Don’t worry if you are paying too much for car insurance to satisfy your lender. There are still steps you can take to lower your premium costs.

  • Compare insurance quotes: Don’t assume the same coverage from different insurance companies will be the same price. Before you decide on a company, get at least three quotes.
  • Ask about discounts. Major insurers offer multiple discounts. These discounts can be as simple as paying your premium online or as complex as a good driver discount that allows you to go without making claims. These discounts can help reduce your costs.
  • Bundle your car insurance. Usually, if you have multiple policies from the same company, you will get a lower rate.
  • Avoid risky driving. You may not consider it a big deal to have some points on your driver’s license, but your insurance company does. You may not be eligible for low-cost premiums if you are assigned to the high risk pool.
  • You can settle for a cheaper car, even though there are many benefits to driving a $70K Tesla. However, insurance costs are not one of them. It is possible to keep your insurance costs down by driving a small car, even if it is more expensive.
  • Keep a high credit score. If your credit score drops, you will pay top dollar for your policy. Your insurer will consider your situation risky and put you at risk of not paying.

Is paying off your car a bad thing for your insurance? It can reduce your insurance costs by keeping the state-mandated coverage and eliminating collision and comprehensive coverage.


A higher insurance premium is required when you finance your car.

  • Your lender will require collision coverage and comprehensive coverage when financing a car. Also known as full coverage.
  • Comprehensive repair and collision of your vehicle in the event you are involved in an accident.
  • Your premiums will go up if you have full coverage.
  • You may be able to reduce coverage if you aren’t using your car.
  • You can save money by taking advantage of discounts and other savings opportunities.

Your lender becomes a part-owner of your car when you finance it. You will need collision and comprehensive coverage to protect your car from any accident, weather catastrophe or other mishaps.

You can make sure that you are not paying more for additional coverage. However, it is possible to reduce costs by taking steps to lower your expenses. You may be able to save money if your car is a seasonal one. Car insurance rates drop once the car is paid off. If you get rid of collision and comprehensive coverage, then yes.