What insurance coverage do I need if I’m financing my car?
Depending on whether you buy your vehicle outright, lease it, or finance it, you might run into different car insurance requirements. (iStock)
Car insurance is an essential purchase that protects you from liability and your car from damage or theft, compared to an uninsured motorist. A lot goes into determining what car insurance coverage types to carry, including the way you pay for your car.
Depending on whether you buy your vehicle outright, lease it, or finance it, you might run into different car insurance requirements.
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With the national average monthly car insurance payment at $124 a month, it’s important to get the right coverage to protect yourself and meet your lender’s conditions.
Leasing vs. financing
If you don’t have cash in hand to buy a car, you have two options: leasing or financing.
Leasing is similar to renting. You pay a fixed monthly amount to drive a new vehicle for the leasing term, usually a few years. You’ll also likely make a down payment, which can lower monthly payments.
The dealer will also set a mileage limit, charging extra for excess miles and extreme wear and tear. Once the term is up, you return the car to the dealership.
When it comes to a financed vehicle, you take out a loan to purchase it, with monthly payments going toward the loan’s principal and interest. Once that's paid off, the car is yours.
Leasing is appealing because it comes with lower monthly payments. However, at the end of the lease, you have no equity.
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Michael Shea, CFP® at Applied Capital, highlights the benefits of financing: "You own the car and it’s an asset on your balance sheet… you will eventually pay it off and not have a monthly car payment, which can save you a lot of money over time. If you choose to invest the saved money, it can help you fund retirement or other goals."
How does financing work?
Here are a few easy steps for financing your car:
- Check your credit: Figure out where your score stands and what’s impacting it.
- Compare options: According to research from Experian, the average interest rate on a new car loan is 4.316%, with a used car averaging 8.43%. To secure the lowest rates, compare quotes from multiple providers.
- Don’t get upside down: Opt for the shortest loan term you can afford, contribute as much as you can to the down payment, and avoid financing add-ons and fees.
- Apply: You can apply for loans from multiple banks and at the dealership; submit applications within a 14-day period to avoid negative effects on your credit report.
- Finalize your purchase: Once you’ve reached an agreement, carefully read all documents before signing.
- Get insured: One of the first steps you’ll need to take is insuring your new car. Visit Credible to explore your auto insurance options.
What coverage do I need when financing?
In most of the country, the state-required minimum is to carry bodily injury and property damage liability coverage on your insurance.
When you lease or finance a car, lenders will require collision and comprehensive coverage as well.
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Here’s what each one encompasses:
- Collision coverage: If your car is damaged or destroyed in an accident, this coverage will pay for repairs, regardless of fault.
- Comprehensive coverage: Comprehensive insurance covers damage from events other than accidents, like hail or vandalism.
Other types of coverage that are not typically recommended for all drivers besides collision and comprehensive include gap insurance and umbrella insurance, which an insurance agent might offer and helps pay for damages in the event of a vehicle being stolen or totaled, for example.
Make sure you’re not overpaying for car insurance. It’s free to check online through Credible’s partners.
Does financing a car affect my credit?
A financed car can have negative and positive effects on your credit over the life of the loan.
Example: After comparing rates, Carol applies for a car loan. The lender runs a hard inquiry, dropping her credit score a couple of points. In two years, the inquiry falls off her report. In the meantime, her new loan lowers the average age of her credit accounts. Since Carol has a 26-year-old mortgage, a 20-year-old credit card, and nine-year-old student loans, the car loan only has a minimal effect. Because an auto loan is a form of installment debt, her credit utilization is not affected. Since she makes payments on time each month, Carol’s payment history improves. The auto loan also adds to her credit mix, boosting her score more.
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Wondering where your credit stands? Visit Credible to check your credit score without negatively impacting it.
Get the right loan and insurance for your new car
Buying a car comes with more considerations than the make, model, and mileage.
You’ll also have to choose a lender, car insurance company, and policy. With full coverage, you can rest assured knowing you’re protected, no matter what comes your way.
By doing your research, monitoring your credit, and comparing car insurance quotes, you can lock in the coverage you need at the best car insurance rates available. Explore pricing and find the right auto insurance plan that fits your needs on Credible.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.