Making Sense of Motor Vehicle Insurance

Required by law in almost every jurisdiction on the planet, motor vehicle insurance is something every car and motorcycle owner must have before they hit the road. It’s a fundamental factor for enabling so many people to become drivers.

For most people, car insurance is little more than a monthly payment and a card they carry in their wallets. That is until they’re involved in an accident or caught driving without coverage. At that point, motor vehicle insurance becomes a significant part of their lives. Their choice of coverage – or their choice to go without it – will either come through for them or come back to haunt them.

What’s more, the month-to-month cost of car and motorcycle insurance adds up over time, making it a part of personal finance as much as personal responsibility. With this in mind, let’s break down the basics of motor vehicle insurance in hopes readers can apply that information to their decisions going forward:

What’s the difference between full coverage and liability only?

Also known as comprehensive insurance, full coverage policies exist to provide additional coverage on top of what’s required by law. On the other hand, liability insurance is the “bare minimum” required by the state in which the vehicle is registered.

The difference between full coverage and liability insurance is highlighted by the following hypothetical: let’s say you rear-ended another vehicle because you were looking down at your phone. If you have full coverage, your car’s damage is covered as much as the damage inflicted on the other vehicle. If you have liability only, the damage to your vehicle becomes an out-of-pocket expense.

It’s also worth noting that any car with a lien placed on it – such as those financed with car loans – will have to be covered by a comprehensive policy. That way, if the vehicle gets totaled in an accident, the lienholder isn’t left high and dry. Once the car loan is repaid and the lien is lifted, the owner can change to liability coverage.

What happens if you drive without insurance?

Driving without insurance is against the law in almost every state and country. First-time offenders are usually let go with a hefty fine, but repeat offenders will have their licenses revoked.

Getting caught without insurance – or causing an accident without coverage – is guaranteed to cost more than it would to obey the law and drive while insured. Most states require motorists to have an SR22 or SR1P certificate if they’ve been caught more than once driving without insurance. These certificates are issued by insurance companies, most of which will price their premiums higher as a reflection of the added risk.

Simply put, driving without insurance will almost certainly cost you time and money in the long run. If you’re having trouble paying your premiums, talk to your insurance company about ways to lower that price or shop around for a new insurance provider.

Which factors influence price?

The data used to determine the price of a policy varies from one insurance company to another. However, all of them take the driving record into consideration.

Age is another crucial factor that determines how much someone pays for car or motorcycle insurance. Generally speaking, policies get cheaper as people get older.

The type of vehicle is yet another factor that decides the price of an insurance policy. All other things being equal, sports cars or motorcycles will undoubtedly cost more to insure than minivans and sedans. Depending on the company, someone’s ZIP code, credit rating, and grade point average can further influence the cost of motor vehicle insurance.

Car insurance is one thing everyone has, but few rarely think about it for longer than a few minutes. However, given the potential consequences of your car insurance decisions, vehicle coverage is nothing to be taken lightly. The first step towards taking car insurance seriously is to learn more about the variations and variables involved.

How Multiple Car Loans Can Increase Your Insurance Rates

One of the most expensive household bills is insurance, no matter what type of insurance you are paying for, whether home, car or health insurance. People are constantly questioning how they can save money on car insurance or how much does adding a second car to insurance cost because they want to keep more of their money in their pockets.

Despite constantly searching for ways to save money on car insurance, people continuously make decisions that raise their rates, sometimes without even realizing the consequences. One of those decisions is financing a car or taking out a car loan in order to purchase a newer car.

So although you may not realize it, car loans can be counterproductive to saving money on car insurance

How Financing and Car Insurance Work Against You

Even though life happens and you cannot help but make certain decisions, financing a car probably will hinder the goal of reducing your monthly bills.

In fact, it can actually increase your monthly bills because financing a car completely alters the insurance requirements you must meet. There is very little flexibility and freedom when choosing insurance coverage because your lender will also be regulating your insurance requirements.

Not following their insurance coverage requirements can result in forfeiting your agreement and losing your car which, in itself, can be an added expense.

Often lenders require coverage throughout the entire year, even if you store a vehicle or do not use it. Additionally, lenders require physical damage coverage. This coverage increases your insurance rates if you were not already planning on buying that type of coverage.

You may not be able to easily shop around for insurance coverage when financing a car due to a number of reasons.

#1 – Lenders Require Full Coverage

In most states, there is a minimum coverage requirement for car insurance, but most lenders require more than the minimum. This is the top expense when you insure a car that has a lien on it because lenders require drivers to have comprehensive and collision coverage.

Aside from paying more for the comprehensive and collision coverage, insurers note that most people who are leasing a car need to have a $500 deductible for both coverages. Having a lower deductible usually increases the cost of monthly payments.

If you were to pay off the remaining balance to your car loan, you could be charged a cancellation fee for ending the specific coverage you have on your vehicle. This equals more money out of your pocket.

Now imagine how much money you will spend when you have multiple outstanding auto loans.

#2 – Relocating Can Increase Insurance Costs

Relocating to another city or even moving into another home can present a number of unexpected costs on its own, but moving can even increase your insurance rates. Usually an increase happens if the area you are moving to has more traffic and people or if you are moving somewhere where your car will not be stored in a garage or covered lot.

Surprisingly, even if you are moving across the street from your job and never use your car, you can still be charged the same rates as if you were driving. This can be counterproductive to your saving goals, but because of the lender requirements, you may still have to pay that sum of money to keep your car insured.

#3 – Your Lender Becomes a Payee

Lenders almost always request to be listed as the payee or the additional insured on your insurance policy. So if your car is totaled during a car accident, they will receive the payout from your insurance provider, not you.

Adding your lender to your policy does not cost more money.

But if, for example, you total your car after being hit unexpectedly and the amount of money the insurance company offers does not cover the total of your car loan. Well, the lender will receive the payout, and you will be stuck with a remaining car loan balance without a car.

Now you have to find a way to pay off the remainder of the loan and find a new car. Once you find a new car, you will have to spend more money on insuring that new vehicle as well. So in a matter of a few days, you could be out of thousands of dollars.

#4 – Insurance Lapse Fees from Your Lender

Since your lender is listed as a loss payee on your insurance plan, they will be notified if you lapse or cancel your policy. Similar to how the state charges you fees for not keeping up your car insurance, your lender can do the same.

Being that following certain insurance requirements is a part of your loan agreement, you will be in breach of contract if you lapse on your insurance. A lapse can result in them charging lapse or cancellation fees. The worst-case scenario is that you lose your car or the lender increases your car loan rates.

Beyond the fees implemented on you from your lender, the state will also charge fees and can suspend your registration. So not only will you have to pay your lender, but you will also have to pay your state to avoid having your car towed or ticketing while operating your vehicle.

#5 – Having a Newer or Older Car

If you are financing an older vehicle, your insurance rates may be higher because your car is more of a risk than a newer one. Older cars are prone to breaking down and having more technical difficulties than newer vehicles.

However, on the other hand, newer cars can increase your insurance rates as well.

If you are financing a newer and more expensive car, your insurance provider may charge you more because the expensive car would cost more to fix. Financing alone already spikes your rates, so adding these two factors on top of it only puts the odds against you.

Several Factors Impact Insurance Rates

There are other factors that could make insurance rates higher when you are financing a car such as your credit history, specifically your payment history and debt. Your driving history and any moving violations you have received, and even where you live and work can affect your rates.

One of the most important things you can do to keep your insurance rates low is to be smart with your money. An easy way of being smart with your money means knowing how multiple car loans will impact your rates, and making the right decisions based on that knowledge.

 

 

 

Imani Francies writes and researches for the auto insurance comparison site, AutoInsurance.org. She earned a Bachelor of Arts in Film and Media and specializes in various forms of media marketing.