If the insurance lapses on a financed car, the lender will usually buy force-placed insurance – an expensive policy that you’re required to pay for – or even repossess the car. Your initial lending agreement will have a clause detailing what happens if insurance coverage lapses on the financed car, so check your contract for specifics.
Force-placed insurance is a costly option that should be avoided, because it is designed to protect the lender’s best interests rather than the driver’s. Force-placed insurance prioritizes the car itself over liability coverage, meaning that it usually doesn’t fulfill the state’s mandatory minimum requirements. As a result, if you’re driving a car with force-placed insurance, you could be paying a lot of money but still violating the law.
Driving without insurance can carry heavy penalties, so if your lender hits you with force-placed insurance, it’s best to quickly find your own policy that fulfills your state’s minimum requirement. As soon as you show your lender proof of enough insurance to fulfill your contract’s requirements, they will remove the force-placed policy. Remember that a financed car will need to carry the state’s mandatory minimums for insurance coverage as well as whatever the lender requires. Lenders often demand additional collision or comprehensive options in order to protect their investment, so be sure to read the contract’s fine print.
When an Insurance Lapse Could Lead to Repossession
Depending on the terms of your contract, your lender might repossess the car if you allow its insurance to lapse. In many states, including California and Florida, your lender can repossess your car without warning if you let your insurance lapse for even a day. Other states, like Massachusetts, require lenders to wait 10 days and then send a notice before repossessing a car. Cars can be repossessed almost anywhere, including your property, as long as the repossession company does not “breach the peace” – threaten, injure, or cause damage – to do so.
Ultimately, lenders are more likely to impose force-placed insurance than repossess your car for a lapse in insurance. But if you fail to pay for the force-placed insurance, repossession begins to look better and better to the lender. And if your state and contract allow it, your car might even be repossessed if you have insurance that doesn’t quite fulfill the lender’s requirements. That’s especially important because repossession is expensive in the long run. The lender often auctions off the car for less than you owe, leaving you responsible for the difference.
What to Do About an Insurance Lapse on a Financed Car
Since having a car get repossessed is clearly a worst-case scenario, the best solution is to keep your insurance from lapsing in the first place. Proactive strategies include paying via automatic deduction, responding immediately to a cancellation warning, and talking to your insurer and lender about suspending or decreasing coverage if you’re being deployed or moving abroad for a time.
If you’re struggling to afford insurance, letting your coverage lapse will actually cost you more in the long run. Instead, contact your insurer and be honest about your finances – they might allow you to delay payments or set up a payment plan. You should also check out WalletHub’s cheap car insurance guide and tips for to how to lower your car insurance costs.
If a lapse is unavoidable or has already happened, call your previous insurer and ask to be reinstated. If it’s too late to continue your old policy, compare quotes for new policies immediately. Bear in mind that lapses are expensive – your old insurer may charge you a fee to be reinstated, and new insurance companies will consider you higher-risk because of your past lack of coverage. But if your insurance already lapsed on a financed car, it’s best to mitigate the damage by getting coverage as soon as possible.
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