How Does Car Financing Affect Your Car Insurance?

Wondering, if car financing affect car insurance? Buying a car on loan is the easiest and the commonest way to purchase a car these days. But can this decision impact your car insurance rates and make it costlier for you? Let’s find out in this blog.

Buying and owning a car is no longer a dream. Financing options or car loans have made this dream turn into a reality for most people in the country. Car purchase is now as simple as buying any other expensive commodity, thanks to the easy and hassle-free option of car finance, offered by a number of banks and other financial institutions in India.

However, there is one question that most car buyers are unsure of while deciding to take car loans. Will this choice to avail car financing affect car insurance that they buy after purchasing the car? Also, would car financing make car insurance plans costlier? Is it perhaps a better idea to go for car purchase by making a single downpayment instead?

To put all these questions to rest, we discuss here how car financing is related to a car insurance policy. Read on.

Does Car Finance Affect Car Insurance Plans?

The answer simply is yes and no. Let’s start with the good news first. No because availing car finance facility does not change the premium rate of your car insurance policy. However (and this answers the yes part of the question), car financing does change the coverage requirements of your policy. Let’s understand this in more detail below.

What Does Car Finance Alter in Your Car Insurance Policy?

As mentioned above, taking a car loan would not change the premium amount payable to the insurance company as part of your auto insurance policy. However, your car finance company (or bank) would require you to extend the coverage of your plan because the lender also becomes a co-owner of the car in this case. Hence, it’d naturally want all risks to be covered as far as the vehicle is concerned. Let’s look at some of the ways financing a car brings changes in your vehicle insurance policy:

1. Full coverage required: Since the bank or the lender is loaning a large amount of money to help you finance a car, it’d want to play it safe from all angles. Therefore, as part of the car insurance plan that you purchase, your lender would need you to go for not just comprehensive coverage but also collision cover. This is generally required over and above the third-party liability basic insurance plan. Through this, the bank/lending financial institution intends to protect itself against any monetary loss incurred with regard to the car. Also, in case of any damage to the vehicle, all expenses are to be borned by the insurance company, whether the damage was caused by the owner (self) or by a third party (third-party liability).
2. Whole-year coverage: Another requirement mandated under car financing is whole-year cost coverage for the vehicle, regardless of the time period for which the car was used by the owner. For instance, you may go on a trip abroad and park your car in the garage for 3 months. In this case, your insurer would still need you to pay for insurance cover for the entire 1 year.
3. Financer as Payee: When the car financing company lends you a specified amount to purchase a car, it may also want to assume the role of a payee or additional insured in the car insurance plan. This is because since the lender has paid the amount to buy the car, it’d expect to receive the benefits of any cost coverage provided by the insurance company in case of any damage to the vehicle.
4. Penalty for lapse of policy: If you have bought a car under car financing option, it becomes extremely important to take care of paying your premiums without fail, to prevent lapse of insurance. This is because your lender is also the payee or additional insured under the plan. It would bring the lender bad repute if the insurance policy lapses. Hence, the financier may penalize you by asking you to pay off the entire loan amount, increasing your EMIs, or even taking possession of the vehicle.
5. Higher premium in case of new or late-model vehicles: Although the car insurance premium rates do not change much in case of car financing, there may be an exception to this rule in case of financing new or late-model cars. The costlier or more advanced the vehicle (technology-wise), the higher the premium rate for the car.

Read More: Does Your Car Insurance Policy Cover Vandalism?

How Does a Car Finance Calculator Help?

It is always advisable to use an online car finance calculator before going to a bank to avail car loan. The car finance calculator helps you determine the exact amount of EMIs you would need to pay the bank once you take a car loan. In addition, it would also help compute the amount you should borrow, the rate of interest on the loan amount, and the EMIs payable throughout the tenure of the loan.

This would help you evaluate where exactly you stand in terms of taking car finance and repaying it and you can then choose car financing as per your specific needs and financial stature.

Wrapping it Up

We understand that car financing not necessarily affect car insurance but alters the coverage requirements under the plan. We also learned that this happens because the lender is also the payee or the additional insured in this case and would want the vehicle to be covered against all risks at any cost.

It is therefore recommended to choose the best car insurance policy in India that provides comprehensive and collision coverage for the vehicle as required by the car financing company. Also, it is always a good idea to go for a car insurance policy online since the entire process can be smooth and hassle-free. Most insurance companies offer online car insurance facilities to their policyholders.

Found this post informational? Browse PayBima Blogs to read interesting posts related to Health Insurance, Car Insurance, Bike Insurance, Term Life Insurance and Investment section. You can visit PayBima to Buy Insurance Online.

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