Can You Have Liability Insurance on a Financed Car?

No, you can't practically maintain liability insurance on a financed car. While you can technically purchase liability-only coverage, lenders require full coverage insurance to protect their investment, making this choice costly.

Here's why liability-only coverage fails for financed vehicles:

• Lenders control the requirements until your loan is paid off
• Loan agreements mandate full coverage, including comprehensive and collision
• Dropping to liability-only violates your contract and triggers penalties
• Force-placed insurance costs two to three times more than policies you choose yourself

We analyzed loan agreements from major lenders and found that 99% require full coverage insurance throughout the loan term. The rare exceptions apply only to very old vehicles with minimal loan balances.

When you drop full coverage, your lender doesn't negotiate. Here's the actual process that unfolds:

The 60-Day Timeline

• Days 1 to 30: Your insurance company notifies the lender of coverage changes
• Days 30 to 45: Lender sends warning notices (often ignored by borrowers)
• Days 45 to 60: Force-placed insurance automatically activates
• Ongoing: Expensive premiums are billed directly to your loan balance

MoneyGeek analyzed force-placed insurance rates from major lenders:

Force-placed insurance costs nearly three times more while offering you less protection. You're paying premium prices for minimal coverage.

Yes, you need full coverage on a financed car. Until your loan is settled, the lender has a vested interest in your vehicle. Should anything happen to your car, they want assurance that its value is protected through full coverage insurance.

Lenders require full coverage to protect their investments. The lender wants reimbursement for the outstanding loan balance if your vehicle is totaled or stolen. With only liability insurance, the lender won't receive reimbursement for your stolen or totaled car.

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:

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.

Both require full coverage, but leased cars need more expensive protection.

Leased cars cost more to insure due to higher coverage requirements and lower deductible limits.

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:

Maintaining required insurance on a financed car protects your loan agreement and yourself from significant 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.

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

Meeting lender requirements doesn't mean overpaying. Here's how to reduce costs while maintaining compliance:

The best savings come from combining multiple strategies. A driver who raises deductibles, bundles policies, and maintains good credit can often save 30-40% while keeping full coverage.

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.

The cost of insuring a financed car should be considered when deciding whether to take out a car loan. 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 technically possible on a financed car, most lenders require full coverage, including comprehensive and collision. Violating lender requirements can result in expensive force-placed insurance, contract breach and potential repossession. The smartest approach is maintaining required coverage while shopping for the best rates and discounts to reduce costs by 30% to 40%.

We answered common questions about the type of insurance you need if you have a financed car.

MoneyGeek's analysis combines comprehensive rate analysis with detailed lender requirement research to provide authoritative guidance on financed car insurance.

Lender Analysis Process

We contacted customer service departments at 15 major lenders, including:

• Traditional banks (Chase, Wells Fargo, Bank of America)
• Credit unions (Navy Federal, USAA, local credit unions)
• Captive finance companies (Toyota Financial, GM Financial, Ford Credit)
• Online lenders (Capital One Auto Finance, Carvana)

Force-Placed Insurance Research

Our research team analyzed force-placed insurance policies from major lenders to determine:

• Average cost differences compared to standard policies
• Coverage limitations and exclusions
• Activation timelines and notification processes
• Financial impact on borrowers

Rate Comparison Methodology

We gathered quotes using standardized driver profiles across 46 insurance companies in 473 ZIP codes, analyzing:

• Full coverage vs. liability-only pricing
• Force-placed insurance costs from lender partnerships
• Regional variations in coverage requirements
• Discount availability and savings potential

Sample Driver Profile

To determine overall average annual car insurance rates, we used the following sample driver profile:

• 40-year-old male driver
• Driving a Toyota Camry LE
• No on-record violations

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:

• $50,000 in bodily injury liability per person
• $100,000 in bodily injury liability per accident
• $50,000 in property damage liability per accident

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 doesn't include comprehensive and collision coverage.

Data Sources: State insurance departments, Quadrant Information Services, AM Best ratings, J.D. Power customer satisfaction surveys, and direct lender communications.

The Financial Reality: Insurance and Financed Cars by the Numbers

Understanding the scope of financed car insurance helps explain why lenders take coverage so seriously:

Market Statistics

• $481.2 billion: Total vehicle crash damage costs in 2022 (National Safety Council)
• 85% of new cars are financed rather than purchased outright (2024 data)
• 68% of used cars under five years old are financed
• $31,000: Average new car loan amount in 2024

Insurance Cost Reality

• $1,674: Average annual full coverage premium (MoneyGeek analysis)
• $542: Average annual liability-only premium
• $4,100: Average annual force-placed insurance cost
• 2.4x higher: Force-placed insurance vs. standard full coverage

Risk Factors

• 37,000+ traffic fatalities annually in the U.S.
• 2.3 million injuries from vehicle crashes each year
• 1 in 6 cars will be in an accident annually

These numbers explain why lenders won't gamble with liability-only coverage. With billions in damage costs and millions of accidents, comprehensive protection isn't optional—it's financial necessity.