Auto loans are a great option to buy vehicles more conveniently without stretching beyond budget constraint. However, there is always a question about the kind of insurance required for auto loans.
Do you need a comprehensive cover if you have a car loan? This article offers a deep dive into insurance requirements for auto loans.
While state law may require you to have minimum liability insurance, if you are still paying loan installments for the car, then you are expected to carry comprehensive, and collision insurance covers often referred to as full coverage. Comprehensive insurance is usually a mandatory requirement from the lender. Since the lender is the lien holder, the car remains their asset until you clear the debt.
That is why lenders have a bigger say on what type of insurance cover you should obtain for the car. With that said, the lender may stipulate how much coverage you should purchase for the car, but the deductible is usually your choice, which gives you control over how much premium to pay.
What are Comprehensive Car Insurance and Deductibles
While most people may be concerned about road accidents, several other risks can damage a vehicle. Comprehensive insurance protects you against these potential damage situations and compensates for damages that are not caused by the driver.
Think of comprehensive insurance as an all-encompassing cover that protects the car owner from paying for physical damages other than collision. In short, comprehensive coverage:
- Compensates for glass damage, which includes windshield cracks and chips.
- Protects against hostile weather conditions such as flood and monster-size hail.
- Can be used as a stand-alone cover or in combination with other covers.
- Repairs damages caused by contact with animals, mostly deer.
- Compensates for damages related to vandalism or theft.
Do comprehensive covers cost more than a liability cover? In most cases, they are relatively expensive, but there are many factors to consider. For instance, if you have an accident-free record, some insurance providers will reward you with low insurance rates. However, as a general rule, the coverage limit is based on actual cash value; the higher the vehicle value, the higher the premiums.
Comprehensive insurance coverage can be purchased as part of a bundle or separately. If you have an auto loan, you are likely to buy the cover as part of the loan package. Depending on the value and age of the car, you may choose to carry over the comprehensive cover even after you have cleared the auto loan.
Unlike the liability insurance coverage, comprehensive coverage has a deductible. A deductible is the amount of money you pay out of your pocket for a claim, leaving the insurer to settle the rest.
For example, if you own a Honda Accord valued $10,000, and your deductible is $500, you will only pay $500 if your car is completely ruined by a tornado. When you file a claim, your insurance provider will compensate the balance ($9,500).
Deductibles for comprehensive (full coverage) range from $250 to $1000, but $500 is usually the most preferred rate. Since you have a big say on how much you will pay as deductible, you can control how much you spend as a premium. For example, if you are comfortable paying $1,000 as deductible, you will pay less premium than someone who has chosen a deductible of $500.
The best way to decide on the appropriate deductible amount is to determine how much you are comfortable to pay from your pocket in the event of a claim. It would be best if you also considered the level of risk. For instance, if you park your car every night under a half-dead tree, or if you live in a tornado path, you may consider a higher deductible.
What Are The Consequences For Taking Short Cuts?
Dropping the comprehensive insurance cover amounts to a violation of the loan contract will most likely jeopardize your loan. It might affect you in the following ways:
- Termination of Loan: Upon signing the auto loan contract, your lender assumes that you have understood and agreed to all the terms and conditions, which include the consequences for breach of contract. If the lender realizes you have violated any of the terms, it can terminate the car loan. This means you will automatically lose the car plus all the paid installments.
- Bad Credit Score: When a lender terminates a contract due to the violation of terms, your payment history will read as incomplete, which has a negative impact on the credit score. Thirty-five percent of your credit score is derived from payment history.
- Higher Monthly Installments: Some lenders may not terminate the loan contract, but may increase your monthly installments. In some cases, the monthly loans installments may spike by over 50%.
- Litigation: In the worst case scenario, the lender may sue you for breach of contract. If the car is damaged or written off and you do not have a comprehensive cover, the lender will come after you to pay for the damages, which is much painful than paying insurance premiums for a comprehensive cover.
What Is the Difference Between Comprehensive Insurance And Collision Insurance?
Comprehensive and collision are two insurance covers that compensate for physical damage on the car. Both covers work hand-in-hand to ensure the insured vehicle is in good shape at all times. On top of this, both covers are part of the mandatory coverage required for auto loans. With that said, it is essential to know their difference to draw the line on the type of risks each insurance type covers.
Collision coverage is ideal if you are looking to protect your car against accident-related damages. It comes in handy when you are on the wrong. In an accident, someone is always at fault, and that person could be you.
Here are few facts about collision coverage as compared to comprehensive coverage.
- Collision coverage is only permitted if you have basic liability coverage.
- Collision coverage can get expensive, but like comprehensive, it has deductibles, which can lower the cost.
- It compensates for damages when two moving cars collide with each other.
- Collision coverage repair damages caused by the driver like sliding into inanimate object or pothole.
In general, more people carry comprehensive covers on their vehicles, so comprehensive claims are more common. Plus, the insurance cover compensates for damages caused by weather and animals thus appealing to the majority. Concerning cost, comprehensive insurance is slightly cheaper than collision coverage.
Why Buy Comprehensive Coverage
Apart from the fact that you need to buy a comprehensive cover for your vehicle because it is required by your lender, here are a few other factors to help you gauge whether you need comprehensive cover or not.
How old is your car? Even if you have finished paying off the car, you still need to consider the current value of the vehicle. Would you be able to pay for the cost of repairs in the event of damage, or will you manage to replace the car if stolen? If you can’t afford any of these, then buying a comprehensive cover is a smart option.
How much do you pay for premiums?
To assess if it is worth paying for comprehensive coverage, compare the cost of the car and the cost of annual premiums. The Insurance Information Institute recommends buying comprehensive coverage if the total yearly premiums multiplied by ten is less than the value of the vehicle. If the car is worth less than this number, then comprehensive may not be a smart option.
Buying a comprehensive coverage for a financed vehicle is inevitable. To effectively manage comprehensive coverage, consider setting up an interest-bearing account dedicated to car insurance expenses then allocate some percentage of the paycheck to the account. This way, you are less likely to be caught off guard. Even if you don't file a claim, you will have your savings account growing.