The first thing that any driver in Canada has to realize is they must have vehicle insurance to drive. There is a basic amount required. In other words, they must have enough insurance to cover the cost associated with an accident.
What many want to know what happens with insurance if they are going to borrow money for a vehicle? Do they have to have any vehicle insurance beyond the basic coverage?
Do You Have to Have Full Coverage on a Car with a Loan?
To begin with, there are many different lending institutions. Ones that will loan money to buy a vehicle. Each of these lending institutions has their criteria. They will have their level of expectations. Some will insist on better credit ratings than others.
Typically when they are lending money for a vehicle, they make some assumptions. It is under the assumption they can take the vehicle back if the borrower does not honour the payments. So, in essence, the vehicle becomes the collateral. Not all lending institutions may think this way. Or act this way. In general, if they are using the car as collateral, there is a lien put on the vehicle making it a secured loan.
There will be some stipulations put on the loan. If the lending institution is going to use the vehicle as collateral. One of these will be that the vehicle has to have full insurance on it. Also that the vehicle is no older than eight years.
The vehicle may not be used as collateral. Then it means that the individual can do what they want with the vehicle. They can put as much insurance on it as they want to. Keep in mind they must have the basic insurance. They can change the car in any way they want. Or they can sell the vehicle. But, the responsibility for the money owed for the vehicle still needs repaying to the lender.
Do You Have to Have Insurance to Buy a Car on Credit?
The mandatory insurance is a must. An individual borrowing to buy a car has to know what the agreement is with the lending institution. In most cases, there will be a clause in the agreement. It is one that indicates that the vehicle has enough insurance coverage to cover the loan. It will mean having comprehensive as well as collision coverage at least with a minimum limit.
The lender may also insist that their institution is listed as the loss payee on the insurance policy. They may do this for two reasons. One is to make sure that they get the payout if the car were a write-off and a claim is made. The other is so that the insurance company will keep them up to date. Showing that the borrow was is honouring the terms of the lending contract.
What Happens if My Car is a Write-Off and I Still Owe Money On It?
Having these type of terms created by the lender gives them a certain amount of protection. But, there are a lot of other factors taken into account. Vehicles do depreciate fast. If an insurance company has to pay out a claim as a write-off, there are metrics they will use. They will rely on the Canadian Redbook to give them a value of what the car is valued at. It is this amount that they will pay out for the claim.
At the start, car repayments go mostly towards the interest.
It does not keep on a par with the value of the vehicle. The interest gets paid off but not the principle that they purchased the car for. It often means that when the insurance pays out the claim, it is much less then what is outstanding on loan.
There is some protection to help with this called Gap insurance.
What is Gap Insurance?
Gap insurance is as the name implies. It fills in the gap between what’s paid out on the car and what’s owed. Not every insurance company offers this type of insurance product. It can be devastating for a car owner that owes money on a car that is a write-off. If the claim doesn’t cover the total cost. Now the individual is out of a vehicle plus still owes money on one that is written off.
Why Should I Consider Gap Insurance?
Gap insurance is going to cost more. It is because it is another potential risk that the insurance company is at. The individual buying insurance has to look at whether the premiums will be worth it. For this extra protection. If the car is an expensive one, then it may be worth taking Gap insurance. Based on how fast the vehicle will depreciate compared to the repayment of the loan.
It will also depend on how much money is put down on the vehicle. If it was a good amount and the amount left owing is minimal, then there may not be a necessity for Gap insurance. If only a minimal amount is put down as a down payment, it means that there’s a good amount of the car left unpaid. The amount owing will be much more than what the actual value of the vehicle is if there were a collision.
Buying your Gap Insurance From the Right Resource
Another thing to consider is that when one is financing a vehicle, the insurance factors will come up. There is a good chance that the lender will suggest Gap insurance and a resource for this. It is vital that the vehicle purchaser do their research on this type of insurance. To make sure that they are getting good rates. It is something that can be shopped for. It is something that should not be just taken because it’s offered by the lending company.