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Do I Need to Get Fully Comprehensive Insurance If I Have a Car Loan?

UK law allows drivers to get behind the wheel on a public road provided they have car insurance. Insurance of whatever type has the same purpose: to give us protection and peace of mind. Fully comprehensive insurance offers the highest possible level of protection. So, what insurance is needed for a car loan

So many people nowadays finance their new cars instead of buying them out of pocket. The price of the car, tax, paperwork… It can end up being a lot. It’s great to have the option of spreading out spendings over a few months or even years with a loan - everything seems possible. However, something that first-time buyers don’t take into account amidst the tornado of information is the cost of insurance. In the UK, it’s the law for any vehicle to be insured, so unfortunately it’s not a cost you can spare. 

Alright, but what’s the difference between the different types of insurance coverages? What will you really need, and what can you skimp on? 🤔 Let’s go over what type of car insurance coverage you’ll really need if you’ve bought your car on finance. 

Is Insurance for Car Loan Mandatory?

First things first: yes, you have to have insurance for your car. The law requires insurance for all vehicles using the public road. The majority of accidents involve other parties, so having insurance really is a necessity to protect you from further costs, which happen much more often than one might think. 

But what about if your car was purchased through a loan -  what type of insurance do you need? Does it has to be comprehensive or can it be third party, which is the minimum you can possibly get? Well, the answer is actually kind of tricky. 

Which Type of Insurance for your Financed Car? 

If you’re leasing a car, we’d definitely recommend getting a fully comprehensive car insurance policy. Some companies may even include it in your loan package. To find out, you’ll have to check with your car finance company since this is not an absolute standard.

Comprehensive car insurance allows you to claim payment in case of an accident, even if you are the one responsible for it. Also, it will cover the car damage even without knowing or proving who might have caused it. This type of car insurance is also known as fully comprehensive. Among the three available levels of car insurance for UK drivers,  it offers the highest possible level of protection. The three levels of car insurance are:

  • Third-party
  • Third-party, fire, and theft
  • Comprehensive

The third-party insurance is the minimum one you can get, but it only covers the other person, thus the name. If you accidentally damaged someone’s property or, worse, caused injury to someone, they will be covered by your insurance. Third-party fire and theft provide the same coverage as third-party insurance, and the difference is it also covers if the vehicle is damaged by fire or if it was stolen. The annual rates of insurance obviously increase the more cover you are getting. 

Insurance Coverage for Financed Cars

Most people purchase their vehicles through car financing, either through a hire purchase agreement or a personal contract purchase agreement. Both types of car financing allow you to get a car on an instalment basis, and you need to pay off everything first before the vehicle becomes yours legally.

What Is a Hire Purchase Agreement (HP)?

Hire purchase (HP) is a form of agreement, especially for purchasing high-priced items. When you enter this deal, you will have to pay a downpayment. You’ll have to pay the balance amount and its interest in instalments. The official transfer of the vehicle will be made after you have paid all the balance payments, with the hire purchase agreement. 

What Is a Personal Contract Purchase Agreement (PCP)?

A personal contract purchase or plan (PCP) is similar to hire purchase in terms of payment, and is also through instalments. The difference with personal contract purchase is you will pay a lower monthly settlement depending on the agreed contract period. The final payment, which is called a balloon payment, will be made at the end of the contract. 

Though there are differences between these two types of contracts, they both imply that the financed vehicle isn’t truly your property until the end of the agreement. That’s why you’ll have to take out fully comprehensive insurance for both of these options. 

Is Insurance More Expensive for Financed Cars?

There are a lot of factors that come into play when determining the rate of insurance you have to pay for your car. First of all, your personal information - age, address, and health status. The state of your health is one of the factors that might influence the cost of your insurance.

Another factor is your driving history. A clean record says a lot about you, and so does an imperfect one. Violations and accident records may mean a more expensive policy. The car type and model can also impact your insurance premium: muscle cars, which are faster and more powerful types of vehicles, can be viewed as high-risk.

If you are looking for ways to reduce your insurance premiums, you could give try giving these tips a go: 

  • The cost of the policy depends on the possible risks involved. Minimise the risk related to your car by placing alarms and sensors to reduce the chance of being robbed. 
  • You might want to try having a black box or telematics insurance.  A piece of equipment will be placed on your vehicle that will monitor your driving pattern, and if you prove to be a cautious driver, you can negotiate to reduce your premiums in the future.
  • If you can make advance payments, then do so. You can also increase your excess payments to lower your premium. 
  • If you are new to driving, you can ask someone with an excellent driver profile if you can add them to your insurance policy. 

Some auto loan companies offer insurance deals that make owning and insuring a car more accessible and affordable. Some manufacturers provide car finance insurance, and they can assist you by subsidising the insurance for affordable monthly payments.

Takeaway

Understanding how insurance works is really important, especially if you’re a young/new driver. The important thing to remember is that fully comprehensive insurance covers a wide range of potential damage, which is important when purchasing a car on finance. As long as the car isn’t technically yours, you’re going to want to stick with the fully comprehensive insurance package. 👍 If you want to start thinking about the overall cost of getting that dream car, you might want to checkout out our on line calculator to get an idea of what your auto loan might cost you, it's simple and easy to use!

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