Here are some other things that will land you in default:
- Selling the collateral on the loan without the lender’s permission
- Leaving the country with the vehicle
- You relocate and don’t tell the lender where the property is located
- You don’t do regular maintenance or repair the car when it’s damaged
- You don’t maintain full coverage on the vehicle
Any of these are valid reasons for the dealer repossessing your vehicle. If the lender has to seize your car after going through the legal process of repossession, it means they gave you multiple notices to resume loan payments or conform to the agreed upon rules, and you didn’t. So the effect on your credit score is much greater. This may make it hard to get a car or find financing in the future.
What happens when you default on a car loan?
When you’re officially in default with your lender, the lender has the right to thier owned property. A lender can lawfully seize a car, and it won’t be long before your car insurance company knows your car has been repossessed.
In some cases, the loan can be taken out of default when the borrower catches up their payments and pays certain fees.
If you can’t make arrangements with the creditor or you try to dodge the issue, the company will send a company to come and seize the vehicle.
This video from 850 Club Credit Consultation, LLC discusses some of your options after your car is repossessed.
In most states, a finance company can repossess a car without notice as soon as the car loan is in default for a valid reason. As long as the creditor doesn’t threaten you, use force, or enter a locked garage, they are within the rights to take the car back.
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What kind of car insurance do you need to finance a car?
It’s always good to know how much insurance you’re required to have when you enter into a loan agreement. Since you’re financing the purchase of property, one of the terms of the loan will be that you buy property insurance.
Unfortunately, you can’t get away with buying a very limited policy if you want to avoid defaulting on your loan.
All financial institutions require their borrowers to maintain full coverage on the financed car. A full coverage insurance policy is needed to protect the collateral on the loan if it were ever damaged in an accident.
It also ensures that the car can be repaired if it’s vandalized and that the loan can be paid off if it’s stolen. Here are the coverage requirements for financed cars:
- Comprehensive – pays to repair or replace the car if it’s damaged in a fire, a storm, a flood, or during an act of vandalism
- Collision – How does collision car insurance work? It pays to repair the car if it’s damaged in a collision.
If you have liability, comprehensive, and collision, that’s generally considered full coverage.
What kind of car insurance do you need to lease a car?
If you’ve entered a lease contract instead of financing, you’re still at risk of having the leased car taken away. You must comply with even stricter insurance rules when you have entered a lease agreement.
Not only do you have to carry full coverage, but the lessee also requires you to carry high limits of liability. Here are some common lease agreement requirements:
- Comprehensive – to pay for non-moving losses to the leased vehicle
- Collision – to pay for damage sustained to the vehicle when the leased car is being operated
- Bodily Injury – must carry at least $100,000 per person, $300,000 per accident in coverage to pay for third-party medical bills
- Property Damage – must carry at least $100,000 in coverage to pay for third-party repairs
- GAP – must carry Guaranteed Auto Protection to pay off your loan when the car is totaled
Bodily injury and property damage are part of liability coverage. The main difference here is that you also need GAP car insurance. (For more information, read our “What happens if my car is totaled and I have GAP insurance?“).
What kind of car insurance do you need if you have a car loan?
The state says that you must carry third-party liability coverage. Here are those minimums compiled by the Insurance Information Institute, regardless of whether you are financing or outright own your car.
Minimum Liability Coverage Required by Law per State
| State | Insurance required | Minimum liability coverage limits |
|---|---|---|
| AL | BI & PD Liab | 25/50/25 |
| AK | BI & PD Liab | 50/100/25 |
| AZ | BI & PD Liab | 15/30/10 |
| AR | BI & PD Liab, PIP | 25/50/25 |
| CA | BI & PD Liab | 15/30/5 |
| CO | BI & PD Liab | 25/50/15 |
| CT | BI & PD Liab, UM, UIM | 25/50/20 |
| DE | BI & PD Liab, PIP | 25/50/10 |
| DC | BI & PD Liab, UM | 25/50/10 |
| FL | PD Liab, PIP | 10/20/10 |
| GA | BI & PD Liab | 25/50/25 |
| HI | BI & PD Liab, PIP | 20/40/10 |
| ID | BI & PD Liab | 25/50/15 |
| IL | BI & PD Liab, UM, UIM | 25/50/20 |
| IN | BI & PD Liab | 25/50/25 |
| IA | BI & PD Liab | 20/40/15 |
| KS | BI & PD Liab, PIP | 25/50/25 |
| KY | BI & PD Liab, PIP, UM, UIM | 25/50/25 |
| LA | BI & PD Liab | 15/30/25 |
| ME | BI & PD Liab, UM, UIM, Medpay | 50/100/25 |
| MD | BI & PD Liab, PIP, UM, UIM | 30/60/15 |
| MA | BI & PD Liab, PIP | 20/40/5 |
| MI | BI & PD Liab, PIP | 20/40/10 |
| MN | BI & PD Liab, PIP, UM, UIM | 30/60/10 |
| MS | BI & PD Liab | 25/50/25 |
| MO | BI & PD Liab, UM | 25/50/25 |
| MT | BI & PD Liab | 25/50/20 |
| NE | BI & PD Liab, UM, UIM | 25/50/25 |
| NV | BI & PD Liab | 25/50/20 |
| NH | FR only | 25/50/25 |
| NJ | BI & PD Liab, PIP, UM, UIM | 15/30/5 |
| NM | BI & PD Liab | 25/50/10 |
| NY | BI & PD Liab, PIP, UM, UIM | 25/50/10 |
| NC | BI & PD Liab, UM, UIM | 30/60/25 |
| ND | BI & PD Liab, PIP, UM, UIM | 25/50/25 |
| OH | BI & PD Liab | 25/50/25 |
| OK | BI & PD Liab | 25/50/25 |
| OR | BI & PD Liab, PIP, UM, UIM | 25/50/20 |
| PA | BI & PD Liab, PIP | 15/30/5 |
| RI | BI & PD Liab | 25/50/25 |
| SC | BI & PD Liab, UM, UIM | 25/50/25 |
| SD | BI & PD Liab, UM, UIM | 25/50/25 |
| TN | BI & PD Liab | 25/50/15 |
| TX | BI & PD Liab, PIP | 30/60/25 |
| UT | BI & PD Liab, PIP | 25/65/15 |
| VT | BI & PD Liab, UM, UIM | 25/50/10 |
| VA | BI & PD Liab, UM, UIM | 25/50/20 |
| WA | BI & PD Liab | 25/50/10 |
| WV | BI & PD Liab, UM, UIM | 25/50/25 |
| WI | BI & PD Liab, UM, Medpay | 25/50/10 |
| WY | BI & PD Liab | 25/50/20 |
The numbers here refer to the amount for each type of coverage. So, 30/60/15 refers to: $30,000 for bodily injury per person, $60,000 for total bodily injury per accident, and $15,000 for property damage.
But you’ll need more than just liability. You’ll need comprehensive car insurance and collision coverage too.
This video from Erie Insurance explains this added coverage.
Unfortunately, if you carry a basic policy you won’t be in compliance with the terms of your contract.
Some people assume having insurance is enough to satisfy everyone, but your auto lender is more concerned with coverage on the car and not mandatory coverage.
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What is force-placed car insurance?
What happens if you don’t have a full coverage auto insurance policy on a financed car and what happens if you drop insurance on a financed car? If you don’t have adequate insurance (full coverage) on a financed car, your loan lender might purchase force-placed insurance. (For more information, read our “My Car Insurance Company Dropped Me“).
Larger lenders may not repossess a car for no insurance but they will force-place insurance. This means that they will add a charge for special lender insurance that only protects the finance company and not you as the borrower. (For more information, read our “Can police see if you don’t have car insurance?“).
There are smaller lenders that will seize cars that don’t have insurance. It’s more common right after the vehicle is financed.
Frequently Asked Questions
We’ve added a few more FAQs about repossessed vehicles and car insurance below.
What do you do if you can’t afford car insurance?
You’ve read that a financed car can be repossessed because of no insurance, but what if you can’t afford that car insurance coverage? for more information read our What should I do if I can’t afford car insurance?
Most insurers provide some kind of discounts, but they do vary by insurer. So, it’s best to shop around and see what kind of discounts you can get. Not only that but credit scores and driving record also county more for some car insurance companies than others.
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