Laws You Should Know About Car Insurance and Loans
As with every binding contract, when obtaining any type of loan on your vehicle, it is important to know the applicable laws and how they relate to car insurance. There are several things to consider when applying for a loan including interest rate, payoff date, and all other legally binding terms of your specific contract. It is a good idea to learn everything you can about adequate car insurance coverage before you sign for any kind of vehicle loan. Making sure you have the right type of coverage will lower your risk of penalties and legal issues.
One of the first things you might consider when applying for a loan is the interest rate. After comparing interest rates and terms from several different lenders, choose the loan that is most practical and affordable for you. While the interest rate is important, clearly understanding the legally binding terms of the loan is imperative as well.
Why Are You Legally Required to Carry Auto Insurance When Financing?
While all 50 states require by law that registered car owners must carry liability insurance, physical damage coverage is not always required. Furthermore, a lending institution sets its own requirements with regard to car insurance. A lender, however, does insist that all borrowers carry physical damage coverage to ensure that any potential damages are paid for, once the deductible has been met. Did you realize that if you want to use your car as collateral when applying for a loan, such as one with TitleMasters lending institution, you must have comprehensive car insurance?
The main reason why a lender requires a borrower to carry physical damage coverage is simple: technically, under the lawful terms of the loan, the lender owns your vehicle until the loan is paid in full. If the borrower were to total the vehicle without insurance, the lender would lose money. In addition to the lender’s requirement that all borrowers have full coverage insurance, you must also list the lender as the "loss payee" or "lessor" of the vehicle. This ensures that during the term of the loan, if a claim check is issued for damages, the lenders will receive payment for the vehicle. Proper insurance will safeguard you against any liabilities during the term of your agreement with the lender.
Acquiring a New Vehicle
If you are in the process of acquiring a new vehicle and you plan on financing your purchase, it is also required by law that you will need to show proof of insurance before driving away with your new car. Your current insurance will extend to your new vehicle for a minimum of 10 days. It is highly recommended that you speak with your insurance agent who can advise you of your limits, verify that you have full coverage, and increase your coverage if necessary. As noted, this is a precaution you must take in order to avoid the possibility of liabilities as a result of inadequate coverage on your vehicle.
Applying For a Title Loan
There may come a time when you need to generate cash. If you own your vehicle outright, one way to get cash quickly is to apply for an auto title loan through a title lender. With this type of loan, you could be eligible to receive up to $5,000 the same day you apply. Depending on the laws in your state, you may only have liability insurance on your vehicle at the time you apply for a loan. If this is the case, check the lender requirements to determine if you must add damage and collision coverage to complete your policy. (These stipulations will vary by lender and also by the amount you borrow.)
While there are lenders who advertise that no insurance is needed, most lenders protect themselves by requiring comprehensive insurance, regardless of the length of the contract. If, for whatever reason, you do not purchase proper insurance, it is absolutely legal for the lender to purchase a lender insurance policy on your car, and forward the costs to you. The rates for this type of insurance are high and they protect only the vehicle, not the driver.
When applying for a car title loan, it is in your best interests to obtain the proper insurance so you can avoid being assessed with forced-placed insurance premiums and other fees. It is also your legal obligation to carry adequate insurance on your car. Making sure you understand all the terms and conditions of any type of loan agreement, and all other legally binding documents, will give you peace of mind and help you avoid risks, liabilities and unnecessary expenses. When in doubt, consult a legal professional.
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Karla M. Somers is a freelance writer and small business owner. She is a contributing author for the lending experts at TitleMasters. From their Johns Creek location, they provide secure financial alternatives to residents of 13 counties in metro Atlanta.