What car insurance do I need for a car loan?
When you’re buying a car, there are a few key things you need to tick off your to-do list before hitting the road – and insurance should be at the top!
No matter whether you’re buying your car outright or financing it, you need to have insurance before you drive it off the dealer’s forecourt. Not only does insurance protect you, your vehicle, and other road users, but it’s a legal requirement if you want to drive on UK roads (and all its many potholes)
Not all insurance policies are created equal. There are three main types of insurance available, each offering different levels of coverage.
While the law only requires you have the minimum level of cover available (called third party which we’ll cover in more detail later on), your finance provider might have other ideas. Depending on the type of finance you have and the lender that gave it to you, the level of insurance you need to have might be specified in the terms of your agreement.
Keen to learn more? Let’s look a little closer at the connection between car loans and car insurance.
Is insurance required when taking out a car loan?
Picture the scene: you’ve fallen in love with a new set of wheels, found a finance deal that works for you, and picked up the keys at the dealership, but now there’s one more task on your to-do list - making sure your new pride and joy is insured.
It’s important to stress that it’s against the law to drive an uninsured car, even if you’re just heading home from the dealership to your driveway!
Not only is insurance essential to protect you and other road users, but you could also face tough penalties if you’re caught driving without cover. This includes learner drivers practising in their parents’ car and owners who leave their car parked on their drive but haven’t declared it officially off-road.
While you won’t necessarily need to have insurance in place when you sign your car loan, you will need to make sure you’re covered before you hit the road. Some dealers will offer a type of temporary insurance known as drive away insurance, which could be included in the car’s purchase price or available as an optional extra. With this in place, you can safely drive your car home before you organise your standard policy - but make sure you double-check the terms and conditions before you get behind the wheel.
What types of insurance are available?
There are three main types of insurance, each offering different levels of cover:
Fully Comprehensive
This is the highest level of insurance you can get and provides the ultimate peace of mind.
You’ll usually be covered for:
- Accidental damage to your car or someone else’s
- Injuries caused to others including your passengers
- Fire damage
- Theft
- Malicious damage and vandalism
Third Party, Fire and Theft
The next level up is third party, fire and theft. It’s not quite the bare minimum as it provides added protection for fire and theft, but any damage to you and your car won’t be covered.
You’ll typically be covered for:
- Damage to someone else’s car
- Injuries caused to others including your passengers
- Fire damage
- Theft
Third Party
Third party insurance is the minimum legal level of insurance in the UK and is designed to offer protection to other people who may be involved in an accident with you.
With third party, you’ll usually be covered for:
- Damage to someone else’s car
- Injuries caused to others including your passengers
If you’re taking out a finance agreement, you’ll likely also come across one more type of insurance: finance GAP insurance. You can find out more information on this in our FAQs section below but, in a nutshell, it’s designed to cover the difference between your car’s value at the time it’s written off or stolen and your outstanding finance amount.
More car finance guides
- What Checks Are Done for Car Finance?
- Can I Get Car Finance If I Don't Yet Have My Licence?
- How to Improve Your Credit Score
- Can I Get Car Finance Without a Credit Check?
Will I need fully comprehensive insurance when taking out car finance?
Third party is the minimum insurance level to legally drive on UK roads, but some car finance lenders will stipulate that you need to have fully comprehensive insurance as part of the agreement. It all depends on the terms and conditions, so it’s another one of those times when it’s best not to skip the small print!
You might find that fully comprehensive insurance is required with types of finance like leasing or Personal Contract Purchase (PCP) when you either won’t ever be the car’s legal owner or won’t be during the loan term. It’s understandable that the lender or lease company would be keen to protect their property with the highest level of insurance.
If you want to take out finance GAP insurance, you’ll also likely need fully comprehensive insurance to qualify.
Is insurance more expensive for cars on finance?
Insurance premiums are based on a whole host of different factors that insurers use to make an educated assessment of your risk profile.
The amount you’ll pay annually, or each month might depend on things like:
- The car’s make and model
- Your annual mileage
- Your driving history
- Your job title
- Where you live and where you keep your car
Whether or not your car is financed isn’t usually a factor considered by insurers. However, if you’ve chosen to combine your finance and insurance into one deal – and one monthly payment – this can sometimes restrict your ability to shop around and find the cheapest deal, so could end up more costly overall.
Can I get car finance with insurance included?
Depending on the car you buy and where you buy it from, you might be offered a package that bundles car finance and insurance together. Typically, these types of deals are more common when you’re buying a brand-new car that’s just rolled off the factory floor.
With an all-inclusive finance and insurance deal, both monthly payments will be combined in one. This can be helpful if you have a lot of different bills to keep track of or struggle to keep up with your payments and worry about falling behind.
However, in return for this added convenience, you might find that you’re more restricted than you’d like to be. Combined deals usually don’t allow you to tailor your insurance policy so that it suits your circumstances perfectly and you might not have access to the same range of policies (and possible savings) that you would if you arranged both of these separately.
FAQs about insurance and car finance
Is it better to have fully comprehensive car insurance?
The best type of insurance for you will always depend on your individual circumstances. Fully comprehensive, as its name suggests, is the most in-depth cover you can have and protects you, other drivers, and pedestrians in the event of an accident. As a result, this level of cover can give you extra peace of mind and, perhaps surprisingly, isn’t always more expensive.
However, it’s not always the right choice for everyone. If your budget is stretched and you can only afford third party or third party, fire, and theft insurance, these levels of cover might be the best option for you.
Do you have to insure a financed car?
No matter whether you’ve bought your car outright or on finance, you need to have insurance before you get behind the wheel. It’s against the law to drive on UK roads without insurance. Not only does it put you and other road users at risk, but you might also be faced with a fine, penalty points on your licence, or your car being confiscated if you’re caught driving without insurance.
Will my insurance pay off my finance?
If you’re unlucky enough to have been involved in an accident where your car was declared a write-off, or it was stolen while you were finally enjoying that weekend away, you can claim on your insurance.
Unfortunately, the amount you get might not be enough to cover your remaining finance.
It’s all due to depreciation – the amount of value your car loses over time.
If you chose a Hire Purchase loan, for example, your finance will be based on the amount the car was worth when you bought it. However, if two or three years have passed, your car could now be worth quite a bit less, especially if it was brand-new when you bought it. If it’s now worth less than your outstanding finance, you’ll be in negative equity.
Your insurance pay-out, on the other hand, will be based on the amount your car was worth when it was written off or stolen. Depending on how much of the finance you’ve paid off so far, that means you could have £2,000 left to pay on a car that’s now only worth £1,500. Your insurance will pay off the bulk of the outstanding finance, but you’ll still need to make up the difference, either from your savings, with a loan, or with GAP insurance.
