Can You Get Liability Insurance on a Financed Car?

When you finance or lease a new car, the lender requires you to have adequate auto insurance coverage to protect their investment in your vehicle. Many people wonder if liability coverage alone meets those requirements when financing a car.

The short answer is yes – you typically can get liability-only insurance on a financed vehicle in most states. However, lenders often impose additional insurance requirements beyond just liability coverage to fully safeguard the vehicle.

What is Liability Car Insurance?

Liability insurance covers bodily injury and property damage that you cause to others when driving your car. It pays for the other party’s medical bills, lost wages, vehicle repairs, and other expenses up to your policy limits.

There are two components of liability insurance:

• Bodily Injury Liability: Covers injuries that you cause to other drivers, passengers, pedestrians, bicyclists, etc. if you are found legally responsible. This pays for their medical treatment, rehabilitation, lost wages from missed work, and pain and suffering.

• Property Damage Liability: Pays for property like buildings, fences, poles, and most importantly, other vehicles that you damage in an accident if you are at fault.

Liability insurance does not cover any damage to your own vehicle after an accident, only the other party’s vehicle and property.

Liability coverage is required in some form by law in almost every state. Minimum liability limits vary by state, typically from $10,000 to $25,000 in bodily injury coverage per person, and $25,000 to $50,000 in total bodily injury coverage per accident.

Why Lenders Require Insurance on Financed Vehicles

When you take out an auto loan or lease a new car, the lender technically owns or has interest in the vehicle until you finish making payments and pay it off. As the lienholder, the lender wants to ensure:

• The car maintains its resale value if you default on payments.
• They avoid losses if the vehicle is damaged or stolen.
• You are held responsible for damages if you cause an accident.

Requiring auto insurance is the primary way lenders protect their investment in financed vehicles. If the car is destroyed or stolen, the lender will receive a payout from your comprehensive and collision coverage to cover the remaining loan balance.

Liability coverage also assures them you can cover the cost of injuries or damage you cause in a crash without the lender being financially responsible.

Are Lenders Satisfied with Liability-Only Insurance?

In most states, lenders cannot legally require you to carry more than state minimum liability coverage on a financed vehicle. This is because the purpose of state liability laws is specifically to protect other drivers, not shield lenders from losses.

Therefore in about 40 “no-fault” states that only mandate liability insurance, you can technically get liability-only coverage on a financed or leased vehicle if you want to save money on premiums.

However, most lenders strongly prefer and recommend you carry these additional coverages as well:

• Comprehensive: Covers damage to your vehicle from theft, vandalism, natural disasters, fire, and animal collisions.

• Collision: Pays to repair or replace your vehicle if damaged in an accident, regardless of fault.

• Gap Insurance: Pays the difference between the value of your totaled vehicle and the remaining balance owed on the loan if the car is destroyed and the insurance settlement doesn’t fully pay off the loan.

• Uninsured/Underinsured Motorist: Protects you if you’re hit by a driver with no or insufficient insurance.

Though lenders can’t require the additional coverage, failing to carry it means you are personally on the hook for any uninsured losses to the vehicle. Carrying more than state minimum liability is highly recommended when financing to get full protection.

When Might Lenders Require Extra Coverage?

While lenders can’t force you to buy comprehensive, collision, or other add-ons, there are certain situations where they may require it as a condition of approving the loan:

• For leases, leasing companies nearly always mandate you carry these extra coverages to avoid losses on vehicles they own. Read your lease carefully.

• For used cars, lenders may impose additional insurance requirements since used vehicles depreciate rapidly after purchase.

• If you make a low downpayment of under 20%, lenders see you as higher risk and may impose comprehensive and collision requirements.

• If you have poor credit, bad credit scores can dictate the need for extra coverage to mitigate risk.

• If you finance for longer terms like 5-6 years, your loan balance remains higher than the car’s value longer, warranting extra protection.

• On certain high-end or luxury vehicles, lenders minimize risk on more valuable cars by requiring more than just liability.

Always read your loan or lease documentation closely to confirm exactly what insurance you are obligated to carry when financing a vehicle.

Shopping for Liability-Only Insurance on a Financed Car

If you decide to carry only liability insurance on your financed vehicle, here are some tips for obtaining the minimum required coverage:

• Comparison shop online and get quotes from 3-5 insurers. Rates can vary dramatically between insurance companies.

• Only consider insurers licensed in your state and financial ratings of A or higher for stability. Avoid cut-rate insurers with poor reputations.

• Ask each insurer what proof of minimum liability coverage they require for financed vehicles. Most need the declarations page showing your coverage.

• Confirm the quote includes the state-required minimum liability amounts of bodily injury and property damage. Increase limits if they seem inadequate.

• Consider adding uninsured motorist coverage if not mandated in your state, so you have protection against uninsured drivers.

• Review policy exclusions carefully to confirm coverage aligns with state liability requirements.

• Provide the necessary proof of insurance paperwork to your lender confirming you’ve obtained minimum required coverage.

Getting liability-only insurance on a financed vehicle takes some extra effort, but can ultimately provide protection at the lowest possible cost in most states. Just make sure to comparison shop extensively and comply with all requirements.