Car insurance for a financed car follows the same law as any other car, but your finance agreement can ask for more than the legal minimum. If you've just been approved or you're still choosing the car, the first thing to know is which cover the lender expects. The next questions are whether extra cover for the finance is worth adding, and what happens to the agreement if the car is written off.
Yes, in most cases, because most car finance agreements ask you to keep fully comprehensive insurance on the car for the whole term. The law asks for less. Third-party cover is the legal minimum, so the comprehensive requirement is a condition of your contract rather than a legal rule.
In most agreements, the requirement sits in the insurance clause, and it applies to Hire Purchase (HP) and Personal Contract Purchase (PCP) alike.
This applies to HP, PCP and conditional sale, because the lender owns the car until the final payment. If you buy the car with a personal loan instead of car finance, you own it from day one, so no lender sets an insurance condition.
Lenders ask for comprehensive cover because the finance company legally owns the car until you make the final payment, so the car is its security for the money you've borrowed. Only comprehensive cover pays out when that security is damaged in an accident you caused.
You're the registered keeper. On the V5C logbook your name appears as keeper, and you arrange the insurance, while the lender stays the legal owner of a car on finance in the background. That's why the lender cares what cover you hold and what happens to the car after a crash.
Comprehensive insurance is the only one of the three main levels that pays for damage to your own car when the accident is your fault. Third-party and TPFT cover protect other people first.
| What's covered | Third party | Third party, fire and theft (TPFT) | Comprehensive |
|---|---|---|---|
| Damage and injury you cause to others | Yes | Yes | Yes |
| Your car if it's stolen | No | Yes | Yes |
| Your car if it catches fire | No | Yes | Yes |
| Damage to your car in an accident you caused | No | No | Yes |
| Usually meets a finance agreement | No | Rarely | Yes |
Put the finance company as the legal owner and yourself as the registered keeper on your insurance quote. Insurers ask both questions because the owner has a financial stake in the car and is usually paid first if it's written off.
A wrong answer could lead your insurer to reduce or refuse a claim. So use the finance company's name exactly as it appears on your agreement, and update the policy once the final payment clears and the car becomes yours.
No, a car on finance doesn't usually cost more to insure just because it's financed. Insurers price your policy on you, the car and the cover level.
Yet comprehensive, the level your lender asks for, isn't automatically the dearest. Some insurers quote comprehensive at the same price as the lower levels or less, so compare all three before assuming the finance has added to your premium.
Yes, some dealers and lenders offer car finance with insurance included in one monthly payment, often on new cars. A bundle is convenient, because you have one payment to track instead of two.
But you can't shop around for the policy inside a bundle. Compare the bundled price with a quote you arrange yourself, and check whether the insurance cost is added to the amount you borrow, because then you could pay interest on it too. Our guide to whether car finance includes insurance covers the details.
Yes, you need insurance before you drive the car away, even for the trip home from the dealer, because the car needs cover on a public road. Some dealers offer short drive-away cover, though your own policy starting on the collection day is simpler.
Once your finance is approved, ask the dealer for the car's registration and the collection date. Then set your policy to start that day, with the finance company named as owner. Once the policy is live, the car should show on the Motor Insurance Database, which you can check for free on askMID.
If your cover is lower than your agreement asks for, you can still drive the car legally, but you've broken the finance agreement. Say you only hold TPFT and you reverse into a wall at a car park. The insurer pays nothing towards your own car, the repair bill is yours, and every monthly payment is still due.
And the lender could treat the breach as grounds to end the agreement. Under section 90 of the Consumer Credit Act 1974, once you've paid a third or more of the total price on an HP or conditional sale agreement, the lender needs a court order to take the car back. So fix your cover the same day if it ever lapses or changes.
But driving with no insurance at all is a criminal offence, and the penalty for driving without insurance starts at a £300 fixed penalty and 6 points.
Guaranteed Asset Protection (GAP) insurance is optional, and it's worth having when you'd owe more on the finance than the car is worth if it were written off. GAP pays some or all of the difference between your insurer's payout and the amount you still owe, depending on the policy.
A comprehensive policy pays the car's market value at the time of the claim. The market value is often less than you still owe. Cars usually lose value fastest in the first couple of years, which is often when the finance balance is highest. So a small deposit, a long term or a model that drops in value quickly all make a shortfall more likely, and owing more than the car is worth is known as negative equity on car finance.
Here's how that plays out (the figures are illustrative). Say the car is written off two years into a five-year agreement. You still owe £14,000 on the finance. The insurer values the car at £11,000. The £3,000 difference is a shortfall you'd normally pay yourself, and a finance GAP policy would cover it, up to its claim limit. Your excess comes off the payout too, so the real gap is £3,000 plus your excess. Some GAP policies don't cover the excess, so check before you buy.
Finance GAP is the type that covers what you owe. Return-to-invoice GAP tops the payout up to the price you paid instead, and vehicle replacement GAP tops it up to the cost of a similar car.
Your insurer usually pays the car's market value to the finance company first, because the finance company owns the car. Anything left after the agreement is settled comes to you, and any shortfall is yours to pay.
A surplus can happen, too (again, the figures are illustrative). Say your settlement figure is £8,000. The insurer values the car at £9,500. The finance company takes its £8,000, and the remaining £1,500 comes to you, minus your excess.
You can't keep a written-off car without the finance company's agreement, because it owns the car until the finance is settled.
For more on each case, see what happens if a car is written off under finance and what happens if your car gets stolen on finance.
Yes, tell your finance company if the car is written off or stolen, because the finance company owns the car and the insurer usually pays it directly. For a repairable accident, check your agreement, as some lenders ask to be told about any claim.
Either way, the monthly payments don't pause while the car is off the road. If a repair leaves you without a car for weeks, a courtesy car from your insurer or the garage is the usual stopgap, so check whether your policy includes one.
You can lower the premium without dropping below the cover your agreement asks for. Start with the car itself.
Add your insurance quote to your likely finance repayment before you apply, so you know the full monthly cost of the car. Carplus runs a soft search through its free car finance eligibility checker, so you can see that repayment without affecting your credit score. Then add fuel, tax and servicing.
And if the numbers work, you make a full application. The lender runs a hard search and checks your income and credit for car finance, and you sign the agreement before you collect the car.
