If I have my car financed, do I need to purchase auto insurance?

The auto loan company holds a lien on your vehicle when you finance it through their company. This lien denotes the financing company’s interest in the vehicle, which does not get released until you have paid off the loan in full. Because of their interest in the vehicle as an asset, insurance lowers the risk of them losing out on their money due to an accident or another issue.

A common requirement for getting a car financed is auto insurance coverage. Since the financed vehicle secures the loan you have with the company, it’s in their best financial interests for the vehicle to have insurance coverage on it at all times. Some financing companies may mandate a specific amount of auto insurance above and beyond the state required minimums to properly protect their interests. Ensure that you have the right type of insurance to meet the financing company’s needs.

If you fail to hold auto insurance on the car while it’s still financed, the financing company has several paths they can take. They may choose to repossess the car, as your financing is contingent on adhering to all of the contract terms. A repossession damages your credit and, if the car is sold for less than the loan amount, still leaves you on the hook for the difference in payments.

The financing company may also purchase coverage on your behalf for the vehicle. This coverage is far more expensive than the plans you can purchase directly, and it’s added to your loan. When the amount gets added to your loan, you pay interest on the insurance as well as the car payment.