What Kind Of Coverage Do You Need for a Financed Car?

Many people don’t just walk onto a car lot with cash in hand and pay for a new car in full right then and there. So for those of you who are taking out a loan for your first — or next — vehicle, you may be wondering what kind of insurance coverage you need for a financed car. We’ll help you figure out just how much and what kind of coverage you need for your new vehicle and navigate the sometimes complicated world of car insurance requirements.

Financed Car Insurance Requirements

Before you drive your car off the lot, you’ll want to know what the minimum coverage for a financed car is. Because you aren’t buying your car outright and are instead borrowing from a lender to pay for it, you’re considered a higher risk due to the debt. So most reputable dealers will require, at minimum, collision and comprehensive insurance coverages for your car in order to protect their investment. Whether you finance your car or not, your state likely requires a minimum amount of bodily injury insurance. Let’s take a closer look at these coverages:

Collision insurance is coverage that helps pay the cost of repairing or replacing your car after it’s damaged in an accident, whether it’s your fault or not. If you get T-boned, rear-ended or side-swiped, or you do the same to someone else’s vehicle, collision coverage helps protect you financially from the expense of repairs.

Comprehensive insurance covers damage caused by accidents that don’t involve colliding with another vehicle or object. This includes vandalism, hail damage and collisions with animals, among other things.

Bodily injury liability coverage helps pay for costs associated with injuries to your passengers, the driver and passengers of the other vehicle. It also can help pay for bodily injury to pedestrians. If you are taken to court over an accident, bodily injury coverage can also help pay for legal fees. Many states require liability coverage, but their minimum requirements are often not enough to fully cover the expenses in the event you’re involved in an accident. Check in with your insurance agent to raise your coverage amounts if you think they’re too low.

Underinsured and uninsured motorist coverage is not always required when financing a car, these coverages can be added to your policy for a broader range of protection on the road. These are two different types of coverage that help pay for damages if you’re in an accident with a driver who either has very minimal car insurance or doesn’t have any at all. Underinsured motorist coverage can help if the other driver doesn’t have enough insurance to cover your costs after an accident, while uninsured motorist coverage can help if the other driver has no insurance whatsoever.


You’ll also need to make sure you carry your proof of insurance with you when you drive in case you’re stopped for any reason. Some states don’t require it, but if you’re driving through a state that does, you’ll want to have it handy.

Do I Need Gap Insurance on a Financed Car?

Lease or loan gap insurance is a useful coverage that can help in the event your car is totaled but you still owe money on your loan. Let’s say you get an auto loan for your car’s full value of $18,000. Months later, you’re involved in an accident where your coverage applies and the vehicle is considered a total loss. The actual cash value of the vehicle is $14,000 — which is what your insurance company will typically pay — but you still owe $17,000 on your loan. This leaves you with a $3,000 bill for a vehicle you no longer have. If you have lease or loan gap coverage, that $3,000 is covered by your insurance instead of it all coming out of your pocket.

Some dealerships will bring up lease or loan gap insurance during the purchase process and offer it to you through them. While it may seem tempting, it’s often much less expensive to purchase gap coverage through your actual insurance provider.

Going car shopping? Connect with your American Family Insurance agent to discuss your auto insurance policy options and learn about all the ways you help protect what matters most out on the road.

Download the MyAmFam app to get easy access to your proof of insurance, pay your bills and request emergency roadside assistance.

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Related Topics: Insurance Needs , Car Insurance