Financing a vehicle comes with certain responsibilities; one of the most important being the requirement to carry car insurance. If you’re asking, “Why is car insurance required to finance a vehicle?” it’s because you need to protect the financial interests of the lender and yourself.

Car insurance safeguards the lender’s collateral

When you finance a car, it serves as its own collateral. This means the lender can repossess the vehicle if you stop making payments. But what happens if the car is totaled or stolen before you’ve paid it off? Without insurance, the lender has no asset to recover, leaving both you and them financially vulnerable.

What happens if you don’t maintain insurance?

If your insurance lapses or you reduce coverage to a level below the required minimum, the lender may take action to protect its interest. Some will purchase what’s known as force-placed insurance, which they can then add to what you owe — usually at a higher cost than standard insurance and with less protection for you. Without the required coverage, you may risk defaulting, which can lead to repossession and long-term credit damage.

Common insurance requirements when financing a car

Most lenders require more than just basic liability coverage. They typically mandate a combination of policies designed to keep the vehicle’s value secure throughout the financing term.

How insurance also protects you

While lender protection is a primary reason car insurance is required, full coverage insurance also safeguards you financially. If your vehicle is damaged or stolen, the right insurance policy can help you avoid paying for repairs or a replacement out of pocket, in addition to still owing the money you’ve borrowed. Insurance can also protect your credit from damage due to missed payments after a loss.

Ready for a newer car?

The Credit Acceptance dealership network is over 15,000 strong. To find one near you, check out our dealer locator. But, before you head over to a lot, get pre-qualified on our website! It’ll give you an idea of the maximum monthly payment which a participating dealer may approve you for.