Do You Need Full Coverage or Just Liability for Your Financed Car?

If you’ve financed a car, you might wonder whether you can choose liability-only insurance to save on premiums. The short answer is: usually not. While it’s technically possible, most lenders require more comprehensive coverage to protect their investment until the loan is paid off. Let’s break down the reasons behind this and your options as a car owner.

What Is Liability Insurance?

Liability insurance covers damages or injuries you cause to other people or their property in an accident where you are at fault. It doesn’t cover damage to your own vehicle or medical expenses for you or your passengers.

• Pros: It’s often the cheapest form of car insurance.
• Cons: Offers no protection for your own car or personal losses.

Why Lenders Require More Than Liability Insurance

When you finance a car, the lender technically owns the vehicle until you’ve paid off the loan. To protect their financial interest, lenders require insurance that covers potential damage to the vehicle. This typically includes:

1. Collision Coverage
   • Covers repairs or replacement of your car if it’s damaged in an accident, regardless of fault.
2. Comprehensive Coverage
   • Covers non-collision-related incidents like theft, vandalism, and weather-related damage.

Together, collision and comprehensive coverage are often referred to as “full coverage.” Lenders mandate these coverages to ensure the vehicle remains valuable enough to cover the loan balance if it’s totaled or stolen.

Can You Legally Get Liability Insurance on a Financed Car?

While there’s no law preventing you from purchasing liability-only insurance on a financed car, your loan agreement with the lender is a binding contract. If you don’t meet their insurance requirements, you could face consequences, such as:

1. Forced-Placed Insurance:
   • If you fail to provide proof of comprehensive and collision coverage, the lender may purchase a policy for you and add the cost to your loan payments. These policies are often more expensive and provide limited protection for you.
2. Loan Default:
   • Failing to comply with the lender’s insurance requirements could be considered a breach of contract, potentially leading to loan default or repossession.

When Can You Choose Liability-Only Insurance?

You can opt for liability-only insurance in the following situations:

1. After the Loan Is Paid Off:
   • Once you own the car outright, you’re free to choose any level of coverage, including liability-only.
2. For Older Cars with Minimal Value:
   • If the car’s value is low and you own it outright, liability-only insurance might make sense financially.

Alternatives to Full Coverage on a Financed Car

If full coverage insurance is straining your budget, consider these cost-saving alternatives:

1. Raise Your Deductibles:
   • Increasing the deductible (the amount you pay out of pocket for a claim) can significantly lower your premiums.
2. Shop Around for Quotes:
   • Different insurers offer different rates, so compare multiple options to find the best deal.
3. Bundle Policies:
   • If you have other insurance needs, such as home or renter’s insurance, bundling them with the same provider can reduce costs.
4. Ask About Discounts:
   • Many insurers offer discounts for good driving records, safety features, or paying premiums in full.

While you can’t typically opt for liability-only insurance on a financed car due to lender requirements, there are ways to make full coverage more affordable. Once your loan is paid off, you can adjust your coverage to suit your financial and personal needs.