Brini Explains What Happens If You Stop Paying Insurance On A Financed Car?
What Happens If You Stop Paying Insurance On A Financed Car?
What Happens If You Stop Paying Insurance On A Financed Car: It was one of those days when everything is slowly coming unstitched. I got soaked when I was in the middle of running errands after a storm came raining by. That was when I realized: what if my car was caught up in that storm and I hadn’t got any insurance? So what if your car is still financed and you stop paying for it? This is one of those situations you don’t think about until you suddenly have your hands dirty. However, knowing what happens if you stop paying insurance on a financed car is important and will save you from disastrous circumstances — believe me.
Insurance On A Financed Car
Most lenders will require you to have full coverage insurance on the car while it’s being financed since they are the ones with a monetary interest in the car. Technically you don’t own the car until you pay it off; if anything happens to it before you pay it off, they’re the ones stuck with the bill. Failing to maintain your insurance can lead to dire consequences, including your lender purchasing “forced coverage” at a much higher price, or worse, default on your loan. Here’s what would happen if you quit paying for insurance for your financed vehicle and why you might want to reconsider just letting that policy lapse.
What Happens If You Stop Insuring A Car That You Finance?
Because when you borrow money to finance a car, technically you are entering into an agreement that the lender is part owner of the vehicle. With most loan agreements, you will be required to have full coverage insurance on the vehicle since the insurer also has a stake in making sure their investment is protected. Failing to insure a car that is still being financed could wreak havoc on your finances. Here are five reasons why carrying insurance on a car you finance just doesn’t matter:
Forced Insurance Coverage — An Expensive Option
The first result of ceasing payments for insurance is that your lender most likely step in and buy insurance for you. It is called forced coverage, and it can cost many times more than the insurance coverage you were purchasing. Forced coverage tends to be a high-cost, short-term fix, and even worse, it only protects the vehicle. Under this policy, you will also be responsible for payment of any medical bills and bodily injuries resulting from the accident, and will also be responsible for damages to other vehicles and people.
Required coverage from lenders protects their investment — not your financial well-being. This policy will only be expensive but very narrow, meaning zero coverage for you and your passengers if you crash. This is why you should always stay on top of those routine insurance payments, to avoid the high price tag of forced insurance.
Significant Increase In Loan Payments
If you let your car insurance lapse and stop paying, your lender may go ahead and buy forced insurance (known as “force-placed insurance” in the industry) on your behalf.
The expense associated with forced insurance is usually added into the payments on your car loan each month.
This extra expense can raise your monthly loan payments by a lot, and make it tough to stick to your budget.
A car loan that was affordable to make one payment could create a financial stressor, particularly if you were struggling financially in other areas.
Higher payments create pressure to find ways to pay for utilities, rent, groceries, etc.
If you have higher payments, you may miss payments, which is a sure way to worsen your situation and maybe even land you deeper in hot water.
Possible Loss Of Auto Loan And Its Repossession
Possible Loss Of Auto Loan And Its Repossession
Failure to keep proper coverage on a financed vehicle can lead to the most severe penalty of all, defaulting on the loan. If you do not have insurance, as required by the loan agreement, not upholding your end of the deal can be considered breaching the contract. If you stop making payments and systemically fail to meet the requirements of your financing agreement, your lender can come take your vehicle back. It is an extreme measure but that is often the result of borrowers not keeping their insurance in place.
If your lender determines the loan terms have been violated, repossession can come quickly. After repossession, your vehicle will often go to auction to try and cover the remaining balance on your loan. That process could leave you car-less and destroy your credit rating so badly that it will be almost impossible for you to obtain loans or credit again in the future.
Debt Collection: A Financial Burden
Repoing your car is not the end of the story, however. If your vehicle fetches a price at auction, it is possible it won’t cover the entire amount owed to the loan. They will still be responsible for paying any remaining money owed (often called a deficiency balance). This means if your vehicle sells for less than you owe on the loan, you will need to pay the difference.
Any outstanding balance can then be forwarded to a collections agency, adding to the fiscal burden. And the debt collectors actually end up taking you to court to collect and that only makes your finances worse. Not only is your car at stake, but your entire financial life. The financial impact of missing insurance payments doesn’t end there; debt collection can take a toll on your credit score and make it more difficult to get credit or a loan in the future.
Impact On Your Credit Score
Loss of Car and Loan Defaults: Without car insurance on a financed car, the car may be repossessed, and that has immediate implications for your credit score.
Reporting to Credit Bureaus: If you fall behind on payments, the lender may report these missed payments to the credit bureaus, and you could see a direct hit to your credit.
Permanent Consequences: When your car is repossessed, the repossession will be obviously visible on your credit report and linger there for as much as seven years, permanently damaging your credit score.
Increased Interest Rates: Your borrowing opportunities may come with less favorable interest rates due to a bruised credit history, resulting in pricier borrowing in the future.
Indirect Effects: If you have a low credit rating, it may also mean that renting a place, getting a job (depending on the job), or getting energy will be more challenging if you can do them at all.
Strained Finances for Years: Missing out on insurance for a car you owe money on can cost you more than your vehicle — it could impact your finances for years to come.
Challenges in Obtaining Loans in the Future: A low credit score can negatively impact a person’s ability to qualify for loans, including mortgages, personal loans, and even new car loans.
Conclusion
After signing on the dotted line for a car loan, it is easy to become complacent about insurance. But when you finance a car, you probably have to keep certain levels of coverage, and failing to do so can have serious consequences. Forced insurance, higher prices, repossession and loan default are all risks that can come as consequences of not having insurance, and those risks are just too steep to risk. As such, if you have trouble finding funds to pay for your car insurance, it is extremely important that before doing so you contact your lender or insurance provider to discuss options.
Ultimately, car insurance is not only about protecting the car itself but also about protecting yourself financially. So, the next time you hear thunder rumbling in the distance, or eye your car insurance policy and think about cutting corners, rest assured: you cannot afford to forgo that car insurance, at least not when your car still has a loan.
FAQ
Another reason not to stop paying for insurance on a financed car is that doing so can result in your lender implementing something called forced insurance. Forced insurance typically costs a lot more than a standard policy and it offers you no protection whatsoever if you get into an accident.
Yes, you may be able to switch to liability-only insurance once you’re done paying for your loan, but your lender typically will require full coverage while the vehicle is being financed.
Forced insurance is when the lender goes out and buys the insurance for you to cover the vehicle should it be damaged or lost — very pricey insurance that covers primarily the vehicle and not you or other drivers.
If you do not pay your insurance, your loan company may start reporting the missed payments, or repossess your car as a result of breaking the terms of the loan, and this could impact your credit.
Yes, if you do not keep the necessary insurance the lender might take the vehicle back, as this is a breach of the loan contract.
