Updated: June 4, 2025
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Most lenders mandate full coverage for financed cars to protect their investment, making it challenging to have only liability insurance while still paying off the loan.
Opting for just liability insurance on a financed car can breach your loan agreement, potentially leading to penalties or the lender purchasing more expensive force-placed insurance on your behalf.
Once you've fully paid off your car loan, you can choose your coverage level, including the option to switch to liability-only insurance if desired.
Yes, you can technically have liability insurance on a financed car, but it's only possible if your loan is fully paid off or your lender doesn't require full coverage, which is rare. If you choose liability-only coverage when full coverage is required, you risk violating your loan agreement.
Yes, you need full coverage on a financed car. Until your loan is settled, the lender has a vested interest in your vehicle as their safety net. Should anything happen to your car, they want assurance that its value is protected through full coverage insurance.
Lenders require full coverage because they want to protect their investments. If your vehicle is totaled or stolen, the lender wants reimbursement for the outstanding loan balance. With only liability insurance, the lender won't receive reimbursement for your stolen or totaled car.
Full coverage insurance isn't a specific product but describes a policy combining multiple coverages. It typically includes liability, collision and comprehensive insurance.
Yes, you need full coverage on a used financed car. When any vehicle is financed, regardless of age, lenders protect their investment by requiring comprehensive and collision coverage.
Used cars can depreciate faster than new ones, creating a gap between what you owe and the car's actual cash value. Some lenders might require gap insurance to cover this difference in case of total loss.
The minimum coverage on a financed car typically exceeds state minimum car insurance requirements. Most lenders require full coverage insurance, which includes:
Protects against non-collision damages like theft, vandalism, fire, natural disasters and animal encounters.
Covers damages to your vehicle resulting from a collision, regardless of who is at fault. This can be a collision with another car or an object like a tree or lamppost.
These are often, but not always, required by lenders.
Sometimes required, especially for new cars. Covers the difference between your car's current value and remaining loan amount if totaled.
Read your financing agreement carefully and discuss with your lender to understand their exact insurance requirements. While the above components are standard for full coverage, your lender might have specific stipulations about deductibles or additional coverages.
Once your loan is paid off, lender requirements end, and coverage becomes a personal decision based on your car's value, financial situation and risk tolerance.
You're likely violating your loan agreement if you only have liability insurance on a financed car. Lenders require full coverage insurance on financed vehicles to protect their investment.
Here's what can happen and the implications of carrying only liability insurance on a financed car:
Your loan agreement will specify the type and amount of insurance you must maintain. If you only have liability insurance, you're not meeting these terms, meaning you're in breach of contract.
If your lender discovers you've dropped required coverages, they might purchase insurance for the vehicle on your behalf. This force-placed or lender-placed insurance costs much more than a policy you'd buy yourself, and the lender adds the cost to your loan balance, increasing your monthly payments or extending your loan term.
Liability insurance only covers damages or injuries you cause to others. It doesn't cover damages to your vehicle. If your financed car is damaged, stolen or totaled, you'd be responsible for repairs or for paying off a car you can no longer use.
If you fail to maintain the required insurance and don't pay for the force-placed insurance, the lender might consider it a default on the loan. This could lead to the lender repossessing the vehicle.
If you reduce your coverage to liability-only, your insurance company might notify your lender of the change, especially if the lender is listed as the lienholder on the policy.
In many cases, if a lender finds out you've reduced your coverage, they'll allow you to correct it by obtaining the required insurance. Act quickly if you receive such a notification.
If you get into an accident without the necessary comprehensive and collision coverages, you'll be paying out of pocket for repairs or vehicle replacement. This can be financially straining, especially when you're still making loan payments.
Maintaining required insurance on a financed car protects both your loan agreement and yourself from major financial losses. If you're struggling with full coverage costs, shop around or speak with an insurance agent to find more affordable options or discounts.
Financing and leasing are ways to obtain a vehicle without paying the full price upfront. With financing, you become the owner after making all payments. With leasing, the lessor remains the owner.
Both typically require full coverage car insurance.
Financing a car means taking out a loan to purchase the vehicle. You'll make monthly payments, including interest, over a set period until you've paid off the loan.
Once you've paid the loan in full, you own the car outright. During the loan period, the financial institution that provided the loan (often called the lienholder) has a financial interest in the vehicle.
Leasing a car is more like renting it for an extended period, two to four years. You'll make monthly payments, but instead of building equity in the car, you're paying for the depreciation during the lease term.
At the end of the lease, you typically have the option to buy the car or return it and start a new lease. You do not own the vehicle during the lease period; the leasing company retains ownership.
Once your car is paid off, the lender's insurance requirements no longer apply. This means you're no longer mandated to carry comprehensive and collision coverage as part of your policy unless you choose to.
Without the obligation to maintain full coverage, you can reduce your coverage, leading to lower insurance premiums. You might decide to drop collision coverage, especially if your car is older and its value has depreciated substantially.
If you carry gap insurance (which covers the difference between the car's actual cash value and the loan amount in case of a total loss), you no longer require it once you've fully paid off your vehicle. You can cancel this coverage.
Now is a good time to assess your insurance needs. While you can reduce coverage to save money, consider the potential out-of-pocket costs if your car is damaged or totaled. Comprehensive and collision coverages can still be beneficial, especially if replacing or repairing your vehicle would be a financial strain.
Paying off your car doesn't automatically lower your insurance premiums, but it gives you more coverage options. Without lender requirements, you can drop comprehensive and collision coverage and switch to liability-only insurance.
This works best for older, less valuable cars. You'll save money monthly but pay out of pocket for theft or damage to your vehicle. Before deciding, check how much insurance you need based on your car's current value.
Paying off your car gives you choices, not guaranteed savings.
Financed cars are more expensive to insure because, unlike insuring an owned car, you can't use only liability insurance. Lenders have more control over coverage requirements and almost always require full coverage auto insurance.
Aspect | Owned Car | Financed Car |
|---|---|---|
Insurance Requirement | Based on owner's preference and state minimums | Typically requires full coverage (comprehensive and collision) in addition to state minimums |
Lender’s Influence | None (no lender involved) | Lender dictates minimum coverage requirements |
Cost of Insurance | Potentially lower if choosing only liability | Typically higher due to full coverage requirement |
Coverage Flexibility | More flexibility to choose or drop coverages | Limited flexibility due to lender requirements |
Gap Insurance | Optional | Often recommended or required |
Consequences of Lapse | Potential legal consequences based on state laws | Breach of loan agreement, potential for force-placed insurance and possible repossession |
Equity | Owner bears full risk of car's depreciation | Lender wants to protect the value of their collateral |
The cost of insuring a financed car is an important factor. It should be considered when deciding whether to take out a loan for a car.
When you finance a car, you're not just committing to the monthly loan payments. The insurance premiums, especially with the requirement for full coverage, can add considerably to your monthly expenses. To offset costs, shop around for policies from at least three providers to find the cheapest full coverage car insurance. Stacking car insurance discounts, like anti-theft or multi-car insurance discounts, can help lower your insurance costs.
While liability insurance is possible on a financed car, most lenders require full coverage, including comprehensive and collision. We covered when liability-only might be an option and the risks of violating lender requirements, including force-placed insurance and higher costs.
We answered common questions about the type of insurance you need if you have a financed car.
No, full coverage car insurance is usually a strict insurance requirement by lenders. Failing to comply with your contract could result in the loss of your loan and potential financial devastation if you're involved in a car accident.
Financed cars usually require:
No, if you bought a car from a dealership with cash and not a loan, you do not need full coverage car insurance. However, you will still need to ensure you meet your state’s minimum car insurance requirements.
MoneyGeek gathered and analyzed rates using a sample driver profile to determine company averages for the cost of liability-only insurance, how liability-only rates compare to full coverage rates and how rates may change for risky driver profiles (drivers with at-fault accidents and tickets).
Data Sources and Depth
We collected data from state insurance departments and Quadrant Information Services and analyzed 83,056 quotes from 46 companies across 473 ZIP codes.
Sample Driver Profile
To determine overall average annual car insurance rates, we used the following sample driver profile:
We modified this sample profile by age, driving record and car make/model where specified to provide average rates for a variety of drivers.
Coverage Levels Explained
Rates collected were for policies meeting the minimum requirements in a given state or for increased liability coverage. Increased liability coverage refers to a policy with 50/100/50 liability limits, which is shorthand for the following:
You can choose how much liability coverage you want on either a liability-only or full coverage policy. The difference between liability-only and full coverage insurance is the addition of comprehensive and collision coverage. A liability-only policy does not include comprehensive and collision coverage.
About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.
