How a Lienholder Can Affect Car Insurance Costs
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UPDATED: Sep 24, 2021
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Your car insurance costs may be affected if you have a lienholder because they hold the title. Most states vary on the amount of insurance you must carry if you do not own your car, though almost everywhere requires you to have some type of coverage even if it’s the basic sort. For example, the State of California and the State of Washington, require liability, comprehensive and collision on financed vehicles.
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Depending on the state where you live and the finance company that provides you with the loan, you may be required carry more than the standard coverage that most car owner’s use, which is liability only. This is because the finance company will hold you responsible for repaying your loan in full before they turn the title over to you. You are bound by your contract until the loan is paid in full, at which point it will be considered a lien-free title.
The automobile insurance industry is aware of this and so an insurance company will usually offer additional protection to ensure the vehicle is kept safe in the event that any sort of claim needs to be filed. However, adding various types of coverage to your auto policy increases your premiums. People who already hold the title of their car can opt for less coverage than those who have a lienholder.
Of course, once all payments are received and the finance company mails the title, you have the option of reevaluating your auto insurance policy.
Working with the finance company to ensure you have the correct level of coverage is the only way to confirm that your level of protection, if you are involved in a motor vehicle collision. This is especially true if severe damage is done.
What are some other types of insurance for financed vehicles?
Aside from comprehensive and collision, many new car dealers will suggest something called guaranteed auto protection or GAP insurance if you lease or finance your car. GAP coverage protects you if your vehicle is damaged beyond repair so that nothing happens to your lien status.
The car insurance company will write the car off as a total loss to clear their books, but this does not remove your financial obligation.
Even if your vehicle is totaled, the finance company or lienholder will still expect you to pay off your loan.
This may seem unfair, but this is the way it works. To keep yourself from spiraling into the chasm of debt, you may want to consider additional coverage such as GAP. Though there are many coverage options out there, so it all depends on how protected you want your vehicle.
Ironically, you may still need to purchase another vehicle after your car accident, especially if you need it to get back and forth to work every day. If you do not utilize GAP insurance, you may be stuck with two car payments and not many people can adjust their budgets to allow this type of responsibility.
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What are lienholder repossession rights regarding insurance?
If you do not have the correct level of coverage, or you begin to miss your monthly payments, and so you allow your car insurance to lapse, your lienholder is notified. By that point, reviews of your auto loan will begin, considering you aren’t the official title holder. The lienholder is the technical vehicle owner, and so they are going to pay close attention to what is going on with the property that they own. Depending on the laws in your state, they have the ability to complete the following:
- Order a full repossession of the vehicle – Because the lienholder is considered the owner of the vehicle until your last payment, they expect you to carry the specified level of coverage for the entire length of the contract. If you fail to obtain the correct amount or worse, allow your coverage to cancel for any period of time, they will seek a judgment against you and order the repossession of the vehicle.
- At that time, your car will be impounded and continue to accrue storage charges. You will need to contact your lienholder with the proper documents before they order the release of the vehicle. Additionally, you will be responsible for paying the storage fees in full before it is released from the impound.
- Give you 30 days to retain auto insurance – In some cases, the finance company may find it prudent to provide you with a grace period. This means you will have 30 days to provide them with a copy of your current insurance policy showing you have obtained the correct level of insurance.
- Request payment in full – This option is rarely exercised; however, if your contract states they can repossess the vehicle if you fail to meet specific obligations, like auto insurance coverage, you may find a letter in the mail requesting full payment. The lienholder will not accept responsibility for a vehicle that has not been insured in accordance with their specifications.
Do you need to notify your lienholder of changes in your policy?
If you decide to change the terms of your car insurance policy, including obtaining a new auto insurance provider, you should notify your lienholder as soon as possible. While most insurance companies will send this information to your lienholder, it is your responsibility to ensure they have the most recent information on file.
Changing the terms to a current policy means you must still verify that the level of protection is acceptable to your lienholder, they have the final say. If they disagree with your changes, you must verify what they will agree to.
Canceling your old policy and acquiring a new provider also requires an update to your lienholder. This will protect you in the event that the new insurance provider fails to send the information in a timely manner. Because you are canceling your old policy, the lienholder will be notified. You want to be talking with experienced agents so that the information gets to where it needs to be, but you can always stay on top of it yourself to make double sure nothing is lost.
You need to make sure the new policy is in effect and updated with the lienholder.
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