You may wonder why your lender requires you to have full coverage insurance when you purchased your new vehicle. It may surprise you to know the reason if you are not familiar with different types of automobile insurance coverages.
What is “Full Coverage?”
Full coverage insurance means that if you are in a car accident, your insurance will cover the cost of damages. This does not include your deductible amount. Sometimes an accident is the fault of another driver. If they have insurance coverage, that insurance provider will cover the cost of repairs. Other times drivers chose to break the law that requires them to carry insurance and you will need to rely on your full coverage to pay the cost of repairs. If you are in an accident involving a stationary object, road damage, or impacting an animal on the roadway, your insurance will cover that as well ONLY if you carry full coverage.
What about Liability coverage and why is it so much cheaper than Full Coverage?
The reason it is so much cheaper is that it offers much less coverage. Liability coverage is required by law to operate a motor vehicle. In the case you are at fault in an accident, it will cover the cost to repair any damages you to another person’s property. It will not cover your vehicle’s damage or your vehicle in a total loss. Do you have enough funds available to cover thousands of dollars in repairs or pay off your loan balance if you are in an accident?
What happens if I total my vehicle that I have a loan on?
If your vehicle is totaled while you still have a loan, you will be required to pay the balance in full. If you are not carrying the required full coverage insurance, you personally will be required to pay off your balance in full. Most lenders do not allow clients to continue with normal payments after a vehicle has been totaled. Ask yourself, “Do I have enough money in the bank to cover my entire loan balance if I am involved in an accident with my vehicle?”
What is a deductible and why does my lender require a specific amount?
Your deductible is the amount of an insurance claim that you will be responsible for. If your lender requires that you carry a $500 deductible you will only need to pay $500 out of pocket. If your insurance deductible is higher, you will be responsible for paying a greater portion of the cost of repairs. Lenders require a specific amount, like $500, because most borrowers can not afford to come up with an amount greater than that when they are in an accident. The large deductible becomes a burden for them and makes it more difficult to keep their loan in good standing.
If I’m in an accident, can I use the insurance money to make my car payment?
In most cases, lenders do not allow borrowers to make payments with their insurance payout unless it is enough to completely pay off their loan. Lenders do not like to have money owed to them on damaged collateral. They will usually require that it is repaired immediately. Insurance companies will only issue a check that includes the lender’s name as the payee. Sometimes it will also have the customer’s name or the repair shop. You will need to have the check sent to your lender to sign before you will be able to deposit or cash the check.
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