The average price of a new car in 2010 was $29,217 as opposed to the 2009 average price of $28,160. According to the National Dealers Association, the average price that people paid for a new car in 2009 is $28,400. The median household income in 2010 was $46,326. That means that the average car sold for more than 50 percent of the average income.
These numbers would indicate that 100 percent of the cars purchased were financed. That is not true, but it does indicate that many cars were financed or leased, and with the financing comes the increase in insurance coverage you are required to carry on your vehicle.
The bank is not going to allow you to finance a vehicle that is underinsured. The contract that you signed had a section on the back in fine print that said you would carry adequate coverage and list the finance company as lienholder. If you were not carrying adequate coverage on the vehicle, you would be in breach of contract and you give permission to the lender to purchase insurance on your behalf.
While it does not sound like a bad thing for the lender to purchase insurance on your behalf, it actually is a bad thing. The lender is going to purchase a policy, which they call forced insurance, and it will only cover the lender’s interest in your vehicle. It is extremely expensive and the lender will force that onto your loan, which you will need to repay. Where your insurance may only cost $1,000 a year, their insurance may cost you $2,400 a year plus the interest charged on new financed amount.
Lenders require you to carry full coverage insurance on your vehicle. The limits set may differ from lender to lender, but the requirement is the same. You are responsible for insuring your vehicle from theft, hail, tree limbs, collision and anything else that may damage the vehicle.
When you call to get your auto insurance comparison quotes, tell the insurance companies that you have a loan on the vehicle. The companies will help you to get the right comparison quotes that will adequately cover your vehicle to satisfy the lender.
The bank is interested in the vehicle’s condition because they have learned that if the car is totaled out or not running, people do not feel it necessary to pay for the loan. This would normally lead to repossession, but if the car is not running, people have had a nonchalant attitude towards threats of repossession.
If the car is in an accident and is totaled out, the amount of money that the insurance company pays for that vehicle goes to the lender towards your loan obligation. If there is a deficient balance on the loan, you are responsible for this deficiency. This is why some people choose to purchase GAP insurance.