UPDATED: Mar 13, 2020
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Cars are expensive. For the graduate who’s fresh out of college, or the man who’s only just got his first job for a month, paying the full price of a car might be too much of a financial burden. With hardly any income and a multitude of other financial commitments such as insurances or even housing installments, adding vehicle installments into the mix will be too much for them to handle. In these cases, it’s no wonder people choose to finance their vehicles through third parties. However, financed vehicles will require the auto insurance that’s covering the vehicle to include coverage specified by the creditor. This article will outline what financed vehicles are and what insurance you’ll need to purchase for your financed vehicle.
What Are Financed Vehicles?
Financed vehicles are, as mentioned, cars that are paid by a finance company, credit union, or bank. These creditors will pay the price of the vehicle to the dealer first, and the owner of the financed vehicle will have to pay the amount loaned back to his or her creditor in installments. Additional charges will apply, and the number of surcharges and the amount of interest will depend on the terms and conditions included in the contract.
It is possible to get these creditors to finance your vehicle through your dealer; you do not have to go to the creditors personally to get your loan. However, the dealer will still sell the contract to the creditors – essentially, you’re still getting the loan from a bank, finance company, or credit union.
What Is the Coverage That Is Required for Financed Vehicles?
In your contract, the creditor will have listed the mandatory coverage to be included in your auto insurance for your financed vehicle. You must take note of the coverage required, and include them when you apply for auto insurance – failure to do say may result in a penalty or even the suspension of your contract with your creditors. Your creditors might reclaim the vehicle as a result.
Creditors often request debtors to have full coverage, which includes:
Minimum liability coverage – The coverage required by the state must be included in your auto insurance for financed vehicles. The usual coverage included consists of Personal Injury Protection, Property Damage Liability, Bodily Injury Liability, and Underinsured/Uninsured Motorist Coverage. Also, your creditor might request you to get a higher amount of coverage as they are financing your vehicle.
Comprehensive coverage – This coverage will insure you from any form of damage to your vehicle not caused by a collision with another automobile or property, such as fire damage, theft, damage from natural causes, and animal collisions.
Collision coverage – This coverage covers your damages from collisions with another vehicle or property.
It must be noted that the creditor might also dictate the maximum amount of deductible you can agree on. You must clarify this point with your creditor before agreeing on the deductible you will pay in an event of any damage covered by the comprehensive and collision coverage – they require deductibles to be agreed upon before the purchase of your auto insurance.
In addition, because your vehicle is financed by your creditor, you might have to pay higher premiums – this is a result of the higher minimum liability coverage you have to apply for when you buy your auto insurance for your automobile.
It is important for you to purchase gap insurance as well. Gap insurance insures you from the difference between the Actual Cash Value (ACV) of your vehicle and the original cost of the vehicle i.e. the amount you owe your creditor.
In the event that your vehicle is “totaled” (determined by whether the total repair costs exceed the ACV of your vehicle), your insurer will only pay out the exact ACV of your vehicle. As such, you will be forced to pay the remaining debts to your creditors out of your own pocket. Gap insurance will protect you from this by paying the difference between the ACV and your vehicle’s original price.
This way, you prevent yourself from being stuck in a financial turmoil because you are unable to pay off the debt owed to your creditors. Gap insurance serves as an additional line of defense against the uncertain future.
Sometimes, getting a loan from a certified creditor may be the only option for you to obtain a vehicle. If this is the case, do remember what you need to include in your insurance for financed vehicles. It does not pay to leave out what must be included in your auto insurance package and find that your creditor has slapped penalties on your premiums because of your mistake.