There is a common belief that a financed car attracts high insurance rates compared to buying a car with cash. While this may not be strictly true, car financing does affect car insurance. Here are three examples of those effects:


When you buy a car on finance, you don't technically own it until you have cleared the loan. The financier has a vested interest in the car, so they will be out to protect their interest at all costs. One way in which they do this is to ensure that you have insured the car, and with a low deductible.

The financier does this because the chances of you not having the deductible (if the car is damaged or totaled) are higher than the chances of the insurer not having the funds to settle a claim. Think of it this way: when a car gets damaged and has to be repaired, would you trust an individual (the car owner) or a company (the insurer) to have ready money for its repair? The low deductible is a way of ensuring that the car will also be fixed or replaced if it gets damaged.

Change in Coverage

Another way in which lenders protect their interest is to ensure that borrowers (car owners) cannot change their insurance coverage without their knowledge. When you buy a car with your own cash, you can change the insurance coverage any time you want; you just contact your agent and ask for the change.  However, matters are different with a financed car. The financier doesn't want you to lower your coverage or increase your deductible since such moves can jeopardize their stake in your car. Therefore, the financier may require you to contact them first before effecting any change in your coverage.

Settlement for a Totaled Car

Lastly, financing your car will also affect how your claim is settled if the car gets written off after getting damaged. If you have purchased your car with cash or when you have paid off your loan, the insurance company will give you a check worth the value of the car if its get totaled.

As explained previously, however, you don't actually own the car if you are still paying the loan on it. Therefore, if it gets totaled, you won't get the entire settlement. The insurer will first pay the finance company the amount that you still owe on the car and then give you the remainder, if there is any.

If you are planning to finance a car, it pays to understand these implications first. It's advisable to consult your car insurance agent and get a thorough understanding of how the lender's requirements will affect your insurance.