Is it Possible to Drop Insurance on a Car that is Being Financed?

When you purchase a car through financing, you are required to have insurance on the vehicle. This is to protect both you and the lender in case of an accident or damage to the car. However, as your financial situation may change over time, you might wonder if it's possible to drop insurance on a car that is being financed. In this article, we will explore this question and provide you with all the information you need to make an informed decision.

The Importance of Insurance on a Financed Car

Before we dive into the details, let's first understand why insurance is important on a financed car. When you finance a vehicle, the lender technically owns the car until you've paid off the loan. This means they have a vested interest in protecting their investment. Having insurance coverage ensures that if the car is damaged or stolen, the lender will be compensated for their loss.

Furthermore, insurance not only protects the lender's interest but also your own. In the event of an accident, insurance can provide the financial backing you need to cover medical expenses, property damage, and any legal liabilities that may arise.

Can You Drop Insurance on a Financed Car?

While the question of whether you can drop insurance on a financed car may seem straightforward, the answer is not as simple. In most cases, lenders require borrowers to maintain full coverage on financed vehicles throughout the loan term. Full coverage typically includes both collision and comprehensive coverage, in addition to the state-mandated liability coverage.

Lenders have strict requirements regarding insurance coverage because they need to protect their investment in the vehicle. If you were to drop insurance and the car is damaged, stolen, or involved in an accident, the lender would be left without any financial recourse.

Exceptions to Dropping Insurance on a Financed Car

While lenders typically require full coverage on financed cars, there may be a few exceptions that allow you to drop certain portions of your insurance. These exceptions usually depend on the lender's policies and state regulations.

1. Paying Off the Loan: Some lenders may allow you to drop collision and comprehensive coverage once you have paid off a certain percentage of the loan. This is because as you pay down the principal, the lender's risk decreases, and their interest in protecting the vehicle diminishes.

2. Low-Value Cars: If your financed car is of low value, the lender may waive the full coverage requirement, as it may not be cost-effective to maintain such coverage. However, this is subject to the lender's discretion, and you should consult with them to determine if this is an option.

3. Refinancing the Loan: If you decide to refinance your car loan, the new lender may have different insurance requirements. As part of the refinancing process, you could explore the possibility of dropping certain coverage types.

It's important to note that the exceptions mentioned above are not guaranteed and vary depending on the lender and state regulations. Always consult with your lender to understand their specific policies regarding insurance coverage.

Consequences of Dropping Insurance on a Financed Car

If you choose to drop insurance on a financed car without obtaining permission from your lender or meeting their insurance requirements, you may face severe consequences. These consequences may include:

1. Loan Default: Most auto loan agreements have a clause that requires borrowers to maintain insurance on the vehicle. If you fail to comply with this requirement, you could be in breach of your loan agreement, resulting in default. Defaulting on your loan can have serious consequences for your credit score and may even lead to repossession of the vehicle by the lender.

2. Forced-Placed Insurance: If you let your insurance lapse or fail to meet the lender's insurance requirements, they may purchase insurance on your behalf. This is known as forced-placed insurance and is typically more expensive than obtaining your own coverage. You will be responsible for paying the premiums for this insurance, which could significantly increase your monthly expenses.

3. Legal Consequences: In some states, driving without insurance is illegal. If you drop insurance on a financed car and continue to drive it, you may be subjected to fines, license suspension, or even jail time, depending on the regulations in your state.

Given the potential consequences, it is advisable to maintain insurance coverage on a financed car, unless you meet the specific requirements set forth by your lender.

Options for Reducing Insurance Costs on a Financed Car

Although dropping insurance on a financed car is generally not recommended, there are ways to reduce your insurance costs. Here are a few options you can consider:

1. Shop Around for Insurance: Different insurance companies offer varying rates, so it's important to compare quotes from multiple providers. Look for companies that offer competitive rates while providing the coverage you need.

2. Increase Your Deductible: By opting for a higher deductible, you can lower your insurance premiums. However, remember that you will be responsible for paying the higher deductible amount in case of an accident or damage to the car.

3. Ask About Discounts: Insurance providers often offer discounts for various reasons. These may include being a safe driver, having a good credit score, or having multiple policies with the same insurer. Make sure to inquire about any available discounts that can help reduce your insurance costs.

4. Bundle Your Policies: If you have other insurance policies, such as home or renter's insurance, consider bundling them with your auto insurance. Many insurers offer discounts for bundling policies, which can result in significant savings.

5. Seek Driver Education: Completing a defensive driving course or driver education program can sometimes qualify you for insurance discounts. These courses can enhance your driving skills and safety knowledge, making you less of a risk in the eyes of insurance providers.

Remember, while these methods can help reduce your insurance costs, the requirement for full coverage on a financed car remains unless you meet the exceptions specified earlier.


In conclusion, dropping insurance on a car that is being financed is generally not advisable. Lenders typically require borrowers to maintain full coverage on financed cars to protect their investment. While there may be some exceptions that allow you to drop certain coverage types, such exceptions are subject to the lender's discretion and state regulations. Dropping insurance without permission or failing to meet the lender's requirements can have severe consequences, including loan default, forced-placed insurance, and legal issues.

If you are looking to reduce your insurance costs on a financed car, consider shopping around for insurance quotes, increasing your deductible, asking about discounts, bundling policies, or seeking driver education. These methods can help you save money without compromising the necessary insurance coverage. Remember to consult with your lender and insurance provider to understand your specific requirements and options.

22 October 2023
Written by John Roche