If you finance your car purchase, the lender and you are co-owners of the vehicle. Because lenders want to protect their investment, they will have requirements for lower deductibles than are required by state law. If you own your car outright, you can choose a high deductible, for example, $1,000. Most car loans will require a deductible of $500 or less.
What if you start off with a lower deductible and raise it later to lower your premiums? That won’t work: you are required to inform your bank about any changes in insurance coverage. The lender is listed as a “loss payee” on the insurance information, and will be notified in case of any change in coverage.
Important Steps to Take When Financing a Car
Before you decide to buy and finance a car, speak with both the lender and the insurance company. Ask for as much information as you can ahead of time. Most insurance companies can quickly provide estimates of monthly insurance prices for different car models and deductible amounts. The lender will be able to give guidelines for the required deductible amounts and coverage.
The first step in checking the insurance premiums is to make a list of the car makes, years, and models you are interested in buying. You can use an easy online tool such as the one offered by NerdWallet to make a quick estimate of your average premiums for different companies and your local area.
Comprehensive and Collision Coverage
You can forego comprehensive and collision coverage if you own your car outright, but it’s unlikely you’ll be able to do without it if you have a car loan. It’s not hard to tell what “collision” coverage means — it covers damage to your car from accidents. Comprehensive coverage refers to other types of damage, including fires, hail, or floods. Comprehensive coverage also covers theft or other types of damage, such as vandalism.
Be sure to read the fine print in your policy. Comprehensive coverage often has exclusions: some common ones are GPS systems that you’ve added to the car, or damage you have caused yourself. While most people understand this to mean that you can’t deliberately damage your vehicle, then file an insurance claim, if you accidentally damage your vehicle with your own garage door, you might not be covered.
Another common exception is “livery conveyance,” which means you are using your car to provide taxi services, such as being a Lyft or Uber driver, or as a pizza delivery driver. While you can get coverage to do these exact things, if you do it without knowing whether or not your insurance is covering you, you may end up having to pay off a car that you can’t get repaired or replaced.
New York Times “Your Money” reporter Ron Lieber advises, “Drivers should ask insurers, point-blank, if they are covered during the period” when they are either looking for passengers or waiting to deliver pizza
One More Than Wheels client chose not to drive for one of the taxi services when she called her insurance company and learned that her premium would be more than she could reasonably expect to earn.
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