You may wonder if having an auto loan affects your insurance rates. The answer to this question is yes but not exactly how you think. An insurance company will not charge you extra money for the same policy because you have an auto loan. What an auto loan does is introduce new coverage requirements to your existing policy.
The additional requirements include comprehensive and collision coverage. What prompts these two extra policies is the fact that lenders normally want to protect their investments. By financing part or all of the cost of the vehicle, the lender becomes a co-owner.
Collision Coverage
Collision coverage is basically an addition that is introduced to your basic liability coverage. This type of policy covers car damages in case of an accident. This is irrespective of whether it was caused by you or someone else.
Considering the fact that you co-own the car with the lender, the lender wants to ensure that the value of the vehicle is maintained. Collision coverage serves this purpose since it covers the cost of restoring the value of the car.
The cost of collision coverage will vary depending on a number of factors, such as the amount of deductible, your state of residence, the value of the car, and your driving record. The coverage can increase the cost of your insurance from a couple of hundred dollars to slightly more. Experts often recommend that you abandon collision coverage if you would like to reduce your auto insurance premium.
Comprehensive Coverage
Comprehensive coverage is another additional requirement needed by most auto lenders. The insurance policy covers car damages caused by non-automotive accidents. This may include floods, fire, theft, vandalism, or a tree falling on a car.
Comprehensive insurance is normally cheaper compared to collision despite the fact that it is subject to all the variables related to collision insurance. These variables include the value of the car, the amount of deductible, your driving record, and the state you live in.
Just like collision insurance, you can always drop it after your loan has been repaid. You can also drop comprehensive coverage if the value of the car has decreased.
How Having a Car Loan Affects Your Rates
Extra coverage translates to additional insurance costs. This means that your monthly bill automatically increases if you have collision and comprehensive coverage. Although comprehensive insurance is usually less costly than collision, having both of them can significantly increase the cost of your insurance.
Reduced Coverage During Non-Use Months
If you have bought auto insurance during a particular time of the year, there’s a way you can save on insurance premiums. For example, if you have purchased a small truck to use during the snowy winter months, a lender may allow you to use a limited policy with comprehensive coverage during months when your truck is not in use.
If the lender is willing to allow you to reduce the coverage, you should contact your insurer to inform them that you won’t be using your truck during the summer.
