Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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The lowdown...

  • Auto loan lenders have very strict contractual requirements that you agree to whenever you sign a finance agreement
  • Any borrower who accepts money to pay for a car needs to comply with loan terms or the car can be taken
  • All lenders want the property they are financing to be insured and this is why they ask for proof of coverage
  • Lenders don’t verify that you have liability coverage but they will ask for proof of full coverage on the vehicle
  • If your policy cancels and the lender is notified, there’s a chance that the car could be repossessed

Never finance a car that you can’t afford to pay for monthly. You’ll have to budget for your monthly auto loan payment and other expenses like fuel, maintenance, and taxes.

If you’re able to afford your principal on your loan plus the interest charge, it doesn’t mean you’re automatically able to afford a vehicle. One expense you must budget for no matter how you’re buying a car is the expense you must pay for auto insurance.

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Auto insurance premiums aren’t avoidable no matter how clever or financially savvy you are. You can shop for low-cost premiums, but you’re never going to get away with paying nothing for coverage unless someone pays your insurance bills for you.

If you ever let your insurance lapse on a financed car, there will be consequences. Here’s what you need to know:

Always Know the Terms of Any Contract You Enter

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You’re entering into a contract with a bank or credit union when you take out a loan to buy a car. Since it’s an auto loan, it’s a form of secured debt. The car is the collateral even when you put down money for loan approval.

As long as you have a stable income and a stable residence, you’ll be able to find a lender willing to offering you some type of financing.

No matter how lenient the lender might seem, all of the documents that you’re required to sign before the check is cut lay out the terms of the loan. You have to comply with these terms not just at the time of the signing, but also for as long as you owe the lender money.

The entire purpose of the terms is to protect the bank from losing money. You should always know the terms whenever you sign a legally binding contract.

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What are common terms set in an auto loan agreement?

You’ll have to familiarize yourself with common terms used on auto loan contracts before you visit any finance office to make everything official. After all, you’d like to know what you’re signing before you enter into a relationship that can last an average of four to six years.

Here are some of the conditions set out in the standard agreement:

  • Repayment schedule outlining how often monies will be repaid and when each payment is due
  • Interest charges and how they will be added
  • The amount of the deposit that will be collected as security
  • Requirement to maintain the vehicle while there is a balance on the loan
  • Requirement to keep the vehicle in the United States
  • Requirement to notify the lender when there is material damage to the vehicle
  • The vehicle can’t be sold to another party until the loan is paid off
  • The borrower must buy full coverage insurance on the vehicle financed
  • If there’s a breach, the borrower must pay penalties or the car can be seized
  • Borrowers must agree to mandatory arbitration instead of going through the court system when there are legal disputes

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What happens to a car if the borrower breaches their contract?

If you don’t make your payment by the date that’s stated in the contract and the grace period passes, you’re guilty of breaching your contract.

Luckily, a payment that’s late by just a week or two won’t lead to a defaulted loan. Most companies won’t even consider a loan in default until you’re at least 90 days late.

If you’re 90 days late or you breach your contract in some other way, it’s the finance company’s right to seize the vehicle because it’s a security interest on the auto loan. Taking back the car in the finance world is called repossession.

It’s not always the answer, but it’s most common for cars to be repossessed when the borrower fails to make payments for an extended period of time.

Is it considered a default when you don’t have insurance?

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You have to have auto insurance on a financed car.

If you’re ever caught financing a car that you aren’t insuring, the lender will put the loan in default status. At this time, it’s the lender’s choice to decide what action needs to be taken next. In most cases, the car won’t be repossessed for failing to buy insurance unless it’s happened more than once.

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What does it mean when the finance company places lender insurance on your loan?

If your auto company sends the loss payee on your policy a letter saying you don’t have insurance anymore, the lender will, in turn, send you a letter asking you to provide proof that you have coverage somewhere else. If you can’t do this, the bank will take action to protect itself from losing money.

Most auto loan companies have a procedure in place where they will buy lender insurance on cars that don’t actively have coverage. You might think that’s generous but it’s not.

This is coverage you’ll pay for, plus interest, on your loan contract. The charge for the insurance is added to your loan balance. Not only does the insurance raise your payments, it also doesn’t protect you in any way.

What type of insurance do you need?

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The lender wants to see that the security on the loan is being protected or there’s no reason for you to pay your payments. You need to have the bank listed as the loss payee on the loan and you must have comprehensive and collision coverage at all times.

You don’t want to lose your car for being irresponsible. If you feel you can afford a car, you have to be able to afford to pay for full coverage insurance too. Get instant quotes online all at once for a policy with property damage coverage now to start budgeting.

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