Do You Need to Prove to Your Lender That You Have Automobile Insurance?
If you can buy a vehicle without taking an auto loan, there are many benefits to you including not paying interest. However, many people finance vehicles through a lender, paying off the lender one monthly payment at a time. Auto insurance is an important factor in this process, because the lender needs to secure its interest in your loan.
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Loss Payee
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When you buy comprehensive and collision coverage on your auto insurance policy, you protect your vehicle against physical damage. Your insurer agrees to pay for necessary repairs to the vehicle, or to pay you the vehicle's value if it is destroyed. However, if your auto loan company is listed as the loss payee, your insurer must give the insurance proceeds to the lender first. You only receive benefits after the lender is satisfied.
Repairs
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In most cases, a lender is satisfied with repairs to your car. Therefore, settlement money for repairs does not usually go to the lender. Rather, auto insurers make settlement checks payable to you and the repair facility you choose. In this way, the lender's interest in your vehicle is still protected, because the vehicle is repaired as close to its pre-accident condition as possible.
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Forced Insurance
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Without insurance coverage, the lender has no way to get paid if you destroy your car. Therefore you typically agree to provide continuous insurance coverage for the duration of the loan when you sign the loan documents. If you break this agreement by not providing insurance, the lender is typically authorized to purchase insurance for you and add the premiums into your car loan. The forced coverage usually only protects the lender's interest in the car, meaning you will never receive any benefits from this insurance. Additionally, it is usually more expensive than coverage from a private insurer.
Proving Coverage
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If you want to avoid paying too much for a forced policy that doesn't protect you, then you must prove to your lender that you have a valid auto insurance policy in force throughout the loan. Typically, your agent lists the loan company as loss payee on the policy, and either the agent or the insurer itself sends proof to the lender that its interests are covered in the event of a loss. Make sure to provide your agent with the lender's information so the policy reflects the correct payee.
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References
- Photo Credit wrecked car image by hazel proudlove from Fotolia.com
