Yes, but your lender will require it as a condition of the loan
When you finance a car, the lender has a legal claim to that vehicle until you pay off the loan. Because of that claim, they require you to carry liability insurance — the coverage that pays for damage or injuries you cause to other people or their property while driving. Your lender will specify a minimum amount of liability coverage you must maintain, and they will check that you have it before releasing the loan funds and periodically throughout the loan term.
Liability insurance is not optional on a financed car the way it might be on a car you own outright (though most states require it by law regardless). Your lender's requirement is a separate contractual obligation written into your loan agreement. If you let your liability coverage lapse, the lender can purchase it on your behalf and add the cost to your loan balance — a practice called force-placed insurance — or they can declare you in default of the loan.
Key Takeaways
- Your lender will require a minimum amount of liability coverage as a condition of financing, typically stated in your loan agreement.
- Liability insurance covers damage or injuries you cause to other people or their property, not damage to your own car.
- If your liability coverage lapses, the lender can purchase insurance on your behalf and charge you for it, or treat the lapse as a loan default.
- You can choose any insurance company and coverage amount that meets or exceeds your lender's minimum requirement.
- Collision and comprehensive coverage are separate from liability and are not required by lenders, though many lenders recommend them to protect their collateral.
What your lender's liability requirement actually means
When you sign loan paperwork, the lender will state a minimum liability limit you must carry — for example, 25/50/25, which means $25,000 per person, $50,000 per accident, and $25,000 for property damage. This is the lender's protection, not yours. If you cause an accident and the injured party sues, your liability insurance pays their claim up to those limits. If the claim exceeds your limit, you are personally responsible for the difference.
The lender's minimum requirement is often lower than what financial advisors recommend you actually carry. Many lenders require 25/50/25 or 15/30/10, but insurance experts often suggest 100/300/100 or higher, depending on your assets and income. You can always carry more liability coverage than your lender requires — you just cannot carry less.
Your lender will ask for proof of liability coverage before closing the loan. You will provide a declarations page from your insurance company showing your policy number, coverage limits, and the vehicle identification number (VIN) of the financed car. The lender may also require that they be named as a lienholder on your policy, which means the insurance company notifies them if your coverage is cancelled or lapses.
How force-placed insurance works if your coverage lapses
If you fail to renew your liability insurance or let a policy lapse, the lender will discover this during their periodic checks or when they attempt to verify coverage. At that point, they have the right to purchase insurance on your behalf. This force-placed insurance is typically more expensive than standard liability coverage and covers only the lender's interest in the vehicle, not yours.
The cost of force-placed insurance is added to your loan balance, meaning you pay interest on it over the remaining term of the loan. A lapse of even a few days can trigger this process. Some lenders charge a fee on top of the insurance premium itself. You can avoid force-placed insurance by maintaining continuous coverage and notifying your lender if you switch insurance companies.
Collision and comprehensive coverage on a financed car
Liability insurance covers damage you cause to others. Collision coverage pays for damage to your own car from an accident, and comprehensive coverage pays for damage from theft, weather, vandalism, or other non-collision events. These are separate from liability and are not legally required in most states.
However, most lenders strongly recommend or require collision and comprehensive coverage while you are paying off the loan. The lender has a financial stake in the car's condition because it serves as collateral for the loan. If your car is totaled and you have no collision coverage, you still owe the full loan balance even though the car is gone. Lenders protect themselves by requiring these coverages, though they may not make them mandatory in writing.
If you finance a car and do not carry collision and comprehensive coverage, you are taking on significant financial risk. If you cause an accident, your liability insurance covers the other person's losses but not yours. If someone else causes the accident or your car is damaged another way, you pay for repairs out of pocket while still owing the full loan amount.
Switching insurance companies while your car is financed
You can switch to a different insurance company at any time, as long as your new policy meets your lender's requirements. You do not need the lender's permission to change insurers. However, you must may support there is no gap in coverage between the old policy's end date and the new policy's start date. Even a one-day lapse can trigger force-placed insurance.
When you switch, provide your new insurance company with your lender's name and the loan account number so they can add the lender as a lienholder on the new policy. Notify your old insurance company of your cancellation date, and make sure your new policy is active before the old one ends. Some insurers will backdate a policy by a day or two if you switch on short notice, but do not rely on this — coordinate the timing yourself.
What happens when you pay off the loan
Once you have paid off the financed car, the lender's lien is released and they no longer have a claim to the vehicle. At that point, liability insurance remains required by law in most states, but the lender can no longer require a specific amount or force-place insurance if you let coverage lapse. You own the car outright and can choose your own coverage limits or, in states where it is legal, carry no insurance at all (though this is not recommended).
When your loan is paid in full, contact your insurance company and ask them to remove the lender as a lienholder. This is a straightforward administrative change and does not affect your coverage or rates.
Frequently Asked Questions
Can I get a car loan without carrying liability insurance?
No. Lenders require liability insurance as a condition of financing. You must have it in place before the loan closes, and you must maintain it throughout the loan term. If you cannot obtain insurance, you cannot close the loan.
What if I get into an accident and my liability limit is too low?
Your liability insurance will pay up to your policy limit, and you are personally responsible for any amount above that. The injured party can sue you for the difference, and a court judgment can result in wage garnishment or liens on your assets. This is why carrying higher limits than your lender requires is often wise.
Does my lender's required liability coverage protect my car if I cause an accident?
No. Liability coverage pays for damage you cause to other people or their property. It does not pay for damage to your own vehicle. For that, you need collision coverage, which is separate and typically recommended by lenders but not always required in writing.
What if I cancel my insurance to save money?
Do not do this. If your coverage lapses, the lender will purchase force-placed insurance on your behalf, which is more expensive than standard coverage and gets added to your loan balance. You will end up paying more, not less, and you will owe the full loan amount even if your car is damaged.
Can my lender cancel my insurance if I miss a payment?
Your lender cannot cancel your insurance directly, but they can declare you in default of the loan if you fail to maintain the required coverage. A default can lead to repossession of the vehicle. Missing loan payments is separate from insurance lapses, but both can trigger serious consequences.