A lending company in most cases requires everyone that gets a new car loan to purchase full coverage insurance. It is different for each state and the different lending companies, but in most cases, this is the normal procedure.
When you sign the contract for the car loan, you will also have to sign an Agreement to Provide Insurance document. This page of the contract is the agreement that you will keep collision, comprehensive, and liability insurance on the car until the end of the loan agreement. On this page, you may also see a paragraph stating that if you lapse in the coverage the lending company will get insurance on the car and then add the cost of the insurance to your car loan payment each month known as force placed insurance. This type of insurance is very expensive.
Car loans are actually secured loans, meaning the car is the collateral. If you do not pay back the loan to the lender, they can take the car and sell it for the money you owe on the new car loan. In order to do this, the car must be kept, as close to the actual cash value as possible or the lender cannot get the money that is left on the loan if they have to repossess the car. This is why the insurance is so important. If the car was in an accident and is not drivable until it is repaired and you do not have insurance, the lender will be repossessing a car that is not worth the amount left on the loan. If you do have insurance, the insurance will pay to repair the car and you can still drive the car and will still in most cases want to make your payments, but if you decide to stop making the payments, the lender should still be able to get the amount left on the loan after the repairs were made.
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