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Can my car be repossessed if I have no insurance?

Here's what you need to know...
  • Loans for the purchase of cars are given from banks, credit unions, and dealerships
  • If you default on your car loan, lenders are within their rights to repossess your vehicle
  • If you fail top purchase adequate coverage, lenders can sometimes repossess your vehicle
  • Lenders also have the option to purchase insurance and apply that cost to your existing loan
  • Understand all the details of your contract to avoid the possibility of your vehicle being repossessed

Cars are linked to almost everything in the life of Americans. They are used as our transportation to work, shopping, and to school. For that reason, most of us incur debt to purchase dependable transportation for ourselves.

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Many organizations lend money for the purchase and lease of automobiles. You can acquire a loan from:

  • Banks
  • Credit Unions
  • Automobile dealers
  • Auto lending companies

As a wise consumer, you should  go to several of these institutions to obtain the best prices for interest and fees. Another place to obtain information about consumer loans is through the Federal Trade Commission’s Consumer Information Division.

Until the obligation to the lending or leasing company is paid for that company has rights to the property financed which may lead to repossession.

These rights vary from state to state, but they usually include the right to repossess the automobile financed or leased should the purchaser reach default status in repayment.

The time limit for default varies from contract to contract and warrants careful reading of the documents you sign.

If you cannot find the time limit in the contract, ask the vendor for these details. Obviously, you do not intend to default on the contract, but circumstances arise occasionally when the money is just not there.

Clauses included in the financing contract may include the following:

  • Provisions for repossession of the item financed upon default of payment
  • Provisions for levying insurance costs upon failure to purchase insurance covering physical damage for the property being purchased
  • Provisions to allow for repossession of the financed item upon failure to purchase physical damage insurance

Comprehensive and Collision Insurance

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Physical damage insurance is referred to as comprehensive and collision insurance under the automobile insurance contract you purchase from your insurance company.

Detailed information on this coverage can be found by consulting your insurance policy or going to the consumer information portion of the National Association of Insurance Commissioners.

Comprehensive coverage provides reimbursement for damage to your car not caused by collision such as:

  • Theft
  • Hail
  • Hitting an animal

Collision coverage pays for damage from a collision with another object such as:

  • A car
  • A pothole
  • The vehicle flips over

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When Can Lenders Repossess Vehicles for Lack of Insurance?

Lenders often add clauses to contracts requiring the borrower to purchase physical damage coverage for the automobile being financed. Two things can happen if you fail to purchase this type of insurance or allow it to expire.

  1. The automobile may be repossessed and returned to the finance company.
  2. The lender may purchase comprehensive and collision through their own insurance supplier and add the cost of that insurance to your loan.

In most cases, once informed of a cancellation of insurance, the lender will purchase physical damage coverage and add the cost to your loan.

Lenders frequently purchase their own insurance policy which offers automatic physical damage insurance that becomes effective when the insurance of the borrower does not apply.

This insurance is routinely purchased by companies that lend-to-purchase many automobiles because it is less expensive to the lender than attempting repossessions.

Problems with Insurance Provided Through a Lender

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If you are at all familiar with insurance, you are aware that you must purchase liability insurance to legally drive your automobile in most of the United States. The lender’s insurance typically does not provide liability insurance, just insurance on the automobile.

If you depend upon the insurance through the lender to provide liability coverage, you may end up with a citation for failure to purchase liability insurance. However, you could also end up with an expensive bill for injury to others and their property necessary to comply with your state’s laws.

Relying upon the physical damage coverage that may be provided by the lender can lead to excessive premiums and costs added to your loan.

You would be well advised to research the costs of insurance you purchase, add the comprehensive and collision coverage needed to protect your loan, and make sure you pay the premiums.

Suggested Insurance Coverage for an Automobile under Loan

  • Bodily injury liability – $50,000 per person/$100,000 per accident for injury to others for which you are responsible
  • Property damage liability – $50,000 per accident for injury to the property of others
  • Medical payments coverage – $1,000 per accident for emergency medical services if involved in an accident
  • Underinsured and uninsured motorists coverage – $50,000 per person and $100,000 per accident to defray costs if you are struck by someone with less than adequate or no insurance. The deductible should be adjusted to fit your contract with the lender.

Check with your state’s insurance department for information about:

  • Insurance companies licensed to write insurance in your state
  • Limits of liability required to comply with your state’s laws
  • Other consumer information relevant to your state

Links to state insurance departments can be found on the NAIC website for your convenience.

Be careful to understand and know the elements of your contract with the lender to avoid repossession of your vehicle and an increase for costs you may pay.

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