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UPDATED: Mar 13, 2020
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Drivers often purchase a car with an auto loan. Financing the vehicle eliminates paying full price for the vehicle in cash. While drivers with bank notes see themselves as the owners of their cars, the financing company holds the title.
That means the bank owns the car until the low is paid off. Until the loan balance is paid in full, borrowers/drivers are obligated to follow all terms the lender dictates in the loan contract. Breaching the terms of the auto loan may lead to the finance company repossessing the car.
Failure to make timely payments on the loan reflects the most common reason for repossession. Other reasons exist including not protecting the vehicle with a current, valid auto insurance policy.
Drivers may be shocked to discover their car suffers repossession due to lack of insurance even when all loan payments are current.
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The Contract Terms
If the terms of the loan contract state the lender retains repossession rights in the advent of a car insurance lapse, then the lender can legally repossess the vehicle. Of course, the lender must follow all applicable state laws regarding repossession.
If the contract does not afford the right to repossess if insurance lapses, then the lender cannot reclaim the vehicle. More than likely, the lender has put an insurance clause into the loan note. Not including that clause makes the loan incredibly risky for the lender.
A bank can potentially suffer a major loss on a loan default. Repossessing the car and selling it allows the bank to recoup a least a portion of a defaulted loan.
Likely, the bank experiences a loss undertaking repossession so lenders frequently seek to work things out when a borrower’s payments are late.
When the vehicle has no insurance coverage, however, the bank may be forced to move quickly with repossession. If an uninsured vehicle is totaled, then the lender would not be able to recoup the balance on the loan.
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The three types of coverage commonly required when taking out an auto insurance loan include:
Auto liability insurance is mandated in almost every state. Not carrying auto liability insurance invites a variety of different penalties. In certain states, jail time is possible.
Beyond the legal woes, a lack of liability insurance creates massive financial risks. Auto liability protection could keep an at-fault driver from bankruptcy after causing an accident.
Ultimately, auto liability insurance pays for damages inflicted upon others up to the terms of the policy. In other words, the insurance policy pays for the driver’s mistakes.
Auto liability coverage does not pay for damages to the at-fault driver’s own vehicle. Collision and comprehensive coverage would be the appropriate coverages to handle these losses.
Comprehensive and collision insurance are not mandated by state law, but the lender clearly has a good reason to require these coverages.
A driver who damages/totals the car by being at fault for an accident can file a collision claim to, hopefully, cover the loss. Comprehensive coverage would cover non-accident-related disasters such as:
- weather events
Again, the lender knows an insurance settlement payoff may be applied to the remaining loan balance. No guarantees exist the borrower could pay off the full balance — or would even attempt to — on a total loss vehicle.
Examine Uninsured/Underinsured Motorist Coverage
One other type of coverage may be worth purchasing even if neither the lender nor the state mandate it: uninsured/underinsured motorist insurance.
When another party, one not carrying appropriate insurance, is liable for destroying the car, a settlement on uninsured/underinsured motorist could go towards the unpaid balance.
This type of insurance coverage eliminates the drawn out process of suing the at-fault driver to recover money. And no guarantee exists the defendant has the money to pay.
Besides repossession, a lender could explore another option. The borrower probably won’t like it, though.
Rather than repossess the vehicle, the insurance company could purchase insurance on the vehicle. The driver/borrower, however, won’t benefit from the deal at all. The financing company would purchase “force-placed insurance” and do so to protect itself.
The driver/borrower does not gain any insurance coverage at all with this policy in place. He/she remains personally responsible for any auto liability judgments. He/she experience the indignity of paying for the insurance, a cost added onto the loan balance.
Moreover, the cost of force-placed insurance usually runs very high. The lender has no real reason to look for deals or comparison shop on behalf of a borrower.
Borrowers/drivers absolutely should perform effective comparison shopping in order to acquire the best policy. With an affordable insurance policy in place, losing coverage becomes less likely. Problems with the lender could then be avoided.
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