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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Car Dealership

Yes, if your car is financed through a used car dealership (or any dealership) then you must buy full coverage auto insurance.

In this conversation full coverage refers to buying collision and comprehensive in addition to state mandated liability protection.

This is true for a number of reasons. The method of financing your vehicle doesn’t change the need for this type of protection.

To learn the specifics of auto insurance requirements for financed vehicles then read on. Also, be sure to enter your zip above for free insurance quotes!

Definition of Full Coverage Auto Insurance

Full coverage relates to the physical condition of the car: you’re insuring repairs to the vehicle as a result of an accident or storm damage.

The loan company has already paid the dealer for your car. Most people don’t think of a loan in these terms and it’s what happens with the money behind the scenes that most people never see.

You probably already know that a loan means you don’t completely own your car until it is paid off: this shows how it actually works. Your approval for a loan means an organization (bank, credit union, or auto loan company) is basically accepting you as a partner. You’re committing to make payments and your partner pays off the cost of the vehicle.

As a result the loan company has a real financial interest in your vehicle. To protect that interest you must carry full coverage. If your vehicle is damaged and not repaired before the load is paid off, the loan company is not protected. This is the purpose of listing the loan company as an additional insured on the policy. You or the lender can make a claim as needed.

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Full coverage may be at the level of replacement cost, or returning your vehicle to pre-accident condition. It is also possible that you could have “actual cash value.” When you have actual cash value coverage the most the insurance company will pay towards a repair is the difference between the damage and the market value of the car. For loans with long-periods or small payments the actual cash value arrangement can result in a negative result—being upside down on the value of your vehicle and remaining loan balance.

Consider if your car cost $20,000 and you put down $2,000, then your payments would be about $400 for 5 years. At the end of the first year you have covered less than $5,000 of the loan. In fact, the total cost of your car is $23, 479.38 at an annual interest rate of 6.5%. If your car is totaled (damaged so much the repairs cost more than the market value of the vehicle) you could end up owing more on the loan than the insurance company would pay out as actual cost value.

The bottom line here is that, just like a house loan, you don’t have clear ownership of that vehicle until the loan is paid off. When you’re making payments you must have insurance that covers the asset, the vehicle, that loan was made to purchase. So regardless of where your financing comes from, any financed vehicle must carry full-coverage insurance.

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What about personal injury and uninsured motorist coverage?

As mentioned earlier, the term full coverage that is used above refers to the need for liability, collision and comprehensive car insurance coverage when you still have a lien on your vehicle. However, this does not include two other very important coverage options that your lender really has no interest in. You, on the other hand, do!

Personal injury protection or PIP is a medical coverage car insurance option that will pay for injury to yourself or others riding in your vehicle. Uninsured and underinsured motorist (UM) coverage will pay when the other driver has no or inadequate insurance to pay for damage they cause. Your need for PIP may be related to your health insurance coverage. However, carrying UM coverage is almost a necessity as many folks drive without the required insurance or are woefully underinsured.

The Takeaway

At the end of the day, financing a car through a car dealership means that you must carry liability, collision and comprehensive coverage. The other coverages mentioned are truly optional. However, having them in place is usually a good idea for your own protection. To compare free quotes just enter your zip in right now!