If My Car is Repossessed, What Happens With My Insurance?

So your car has been repossessed. You have car insurance on your vehicle. But what happens to that car insurance now?

How does a vehicle repossession affect car insurance prices? Can you safely cancel your previous insurance policy after a vehicle repossession? Will your insurance company look negatively upon a vehicle repossession? These are all good questions. We’re about to answer them.

You’re Required to Have Full Insurance Coverage on your Vehicle Until It’s Paid Off

First, let’s make something clear: when you’re leasing a vehicle or making car payments, then you don’t fully own your vehicle. The car dealership or their financing company partly owns your vehicle. That lender, in most situations, requires you to keep full insurance coverage on your vehicle until it’s paid off.Repossessed Car

If you fail to maintain full insurance coverage on your vehicle, then you’re violating the terms of the agreement between the lender and the borrower. At this point, the lender may require the borrower to pay for full insurance coverage. You might see also see a surcharge on your next car payment.

The reason lenders require full insurance is simple: lenders are already taking a substantial risk by financing a vehicle. Vehicles can get stolen. They can be destroyed in an accident. They lose their value over time. Lenders can miss payments. For all of these reasons, it’s understandable that lenders require an extra layer of protection on the asset being used as collateral – the vehicle.

If you, the borrower, can’t make a car payment, then the lender needs to repossess the vehicle and sell the car to recoup its losses. In many cases, the lender will never recover the full value of the loan, especially when considering the costs of repossession, selling the vehicle, and securing the residual from the borrower.

Ultimately, repossessing a vehicle is costly, and that’s why lenders try to avoid it whenever possible. It’s better for a lender if a vehicle is wrecked, totaled, or stolen before they can repossess it. In these situations, insurance will cover the losses. Eve if the borrower refuses to put full insurance coverage on a vehicle, the lender may choose to do so and then pass the costs along the borrower.

What Happens After a Repossession?

We’ve explained how insurance works on a vehicle you’re financing or leasing. Now, it’s time to look at how repossession works.

What happens when you have car insurance for a vehicle that has been repossessed?

Normally, a car’s insurance coverage is held by the person with possession of the vehicle. However, this isn’t the case when the vehicle is financed. In this situation, the proceeds of an insurance settlement will first go to the lender to pay off the vehicle’s outstanding balance and then to the individual who owns the vehicle.

Typically, You Want to Maintain Basic Liability Coverage After Repossession

If your car has been repossessed by the lender, then the situation becomes a little complicated. If your car has been repossessed, then it typically means you missed a car insurance payment. If you missed a car insurance payment, then chances are also high that you’ve missed a recent insurance payment. In this situation, your lender’s auto insurance may apply, and you may be forced to pay a higher car payment.

In other cases, you’ve missed a car payment but your insurance is still active. In this case, it’s in your best interest to continue maintaining car insurance coverage until after the car is sold by the lender.

The reason you want to keep car insurance on a repossessed vehicle is simple: you have full control over the car insurance policy you choose, but you don’t have as much control over the insurance policy chosen by your lender (or the repossession company). Ideally, you’ll maintain insurance coverage on your vehicle until it has been sold.

Check with the Repossession Company to Make Sure Your Car Insurance Isn’t Redundant

There are situations where you may not want to continue paying for car insurance on your repossessed vehicle.

Sometimes, the repossession company will insure a vehicle under their own plan as soon as its in their possession. In this situation, your coverage may be redundant once the vehicle is out of your hands, in which case you may get no advantage from maintaining your own liability insurance.

Will a Repossession Raise Insurance Rates in the Future?

A repossession is a financial issue – not a liability issue. A repossession doesn’t require a claim to your insurance company and it doesn’t cost your insurance company anything. Theoretically, it shouldn’t increase insurance rates.

Unfortunately for you, your insurance rates will almost certainly increase after a repossession. That’s because a repossession will devastate your credit score. Your credit score has a significant impact on your car insurance.

Fortunately for you, some states make it illegal to use credit score as a factor when determining insurance prices. In these states, your insurance premiums are unlikely to increase after a repossession.

Conclusion

A vehicle repossession can be messy. If your vehicle has been repossessed, then you’ll typically want to maintain basic liability coverage on the vehicle until it is sold. Once it’s sold, you can cancel coverage. The only exception is when the repossession company applies their own insurance to the vehicle after taking possession, in which case your coverage will be redundant and you can freely cancel it.

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