If you have bought or owned a car before, you know that you have to make several decisions. It’s not just picking a particular vehicle or deciding what your overall budget is. You also have to factor in how much insurance is going to cost you every month, as well as whether or not you’re going to finance it or buy it outright with cash.
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Financing Does Not Hurt Insurance Rates
Many drivers have a misconception that their insurance rates are going to be higher for a financed vehicle since the lender is a loss payee, and that an owned vehicle means cheaper rates. This is, in fact, patently false. Your insurance rates are determined by your driving record, personal details, credit score and a few other factors.
When Financing Does Increase Insurance Costs
While financing a vehicle will not impact insurance rates, it can still result in higher insurance premiums in some states. Every state except New Hampshire has minimum insurance standards. In many states, the minimums are the same for both owned and financed vehicles, which means there is no difference in costs. However, some states have higher minimums for financed vehicles to protect the loss payee.
Even in states that do not require full coverage for a financed car, it might be required by the lender or finance company. A full-coverage is typically defined as the state minimums along with coverage for physical damages.
Consider an example of Janie buying a new car with $11,000 in cash. She gets full insurance coverage to protect her investment. Sometime later, she needs money, so she finances a car loan. She has to call her insurance agent to list the lender as a new loss payee, but her rates and premiums don’t change since she already had full coverage.
On the other hand, her friend Susanne paid full cash for her new car but didn’t opt for full insurance coverage because she considered her risks of any damage to be minimal. A close call at an intersection changed her mind about getting full insurance coverage, which she does. The additional coverage requirements add $45 a month to her bill, resulting in $540 annually she must pay now.
A third friend, Emily, played things the smartest in terms of saving money. She got an auto loan with a finance rate lower than her interest in a money market account, which meant that saving the money and making monthly payments was cheaper over time. She also refinanced her loan every six months to lower the monthly payments, but once she did get the car paid off, she then safely switched to the minimum monthly insurance since her car was now older and not worth as much.
This is a rider that is frequently added to basic liability coverage. If you finance a vehicle, you are required to have it. If you own your car, you might be able to drop it to save hundreds or even thousands per year, but you would be responsible for fixing or replacing your vehicle in the event of an accident or loss. You should only do this if the car is worth less than $2,000 and you have that amount in cash saved up.
This rider is usually cheaper than collision, and it covers damage to your vehicle from anything other than accidents. Dropping it won’t save nearly as much money, and again, you should only drop it if your car is worth less than $2,000 and you have that much saved up.
Some drivers who finance, try to start with the required deductibles and coverage and then dial things back later so they can save money. However, lenders are always notified of such changes, and doing something like this can trigger serious penalties, possibly leading up to having the vehicle repossessed and a broken lease on your credit report.
Sorry, New Hampshire
This is the one state that doesn’t mandate all drivers to keep active auto insurance coverage. However, if you finance a vehicle, even this state requires minimum coverage to protect lenders.
Saving Money On Car Insurance
- If you feel safe doing so and own your vehicle, you can switch to the state minimums if you’re allowed to drop comprehensive and collision.
- Pay off a financed vehicle as quickly as you can. The faster you own, the sooner you can drop the higher coverage required for lenders.
- Mind your credit score. Lower numbers mean higher rates since you’re seen as more of a risk.
- Shop around every six months. Don’t sign up for 12-month policies, because the more often you can shop around, the more you can take advantage of lower car value. This is most beneficial at your first renewal, considering how much car value drops in the first six months.
- Don’t do car insurance in installments. This typically means $3 a month in service charges, which is $36 a year. Every bit adds up.
- Never get a ticket or wreck your car. Not only does this keep your driving record clean, it means no one has to pay out for your car getting fixed, regardless of what your insurance coverage looks like. Also, take advantage of any safe driver courses that might drop points or lower your rates.