A lienholder is a lender, bank, credit union, or financial institution that holds a legal claim on a vehicle until the loan used to purchase it is paid in full. If you finance a vehicle, the lender typically becomes the car loan lienholder and maintains a financial interest in the vehicle throughout the life of the loan.
Because the lender has invested money in the vehicle, they want to protect that investment. As a result, a lienholder may require you to carry specific types of auto insurance coverage while the loan remains active.
Understanding what a lienholder is and how it affects your insurance can help you stay compliant with your loan agreement and avoid unexpected issues with your coverage.
How does a lienholder affect your auto insurance?
When a lienholder has a financial interest in a vehicle, they may require the borrower to carry certain types of coverage to help protect that interest. These requirements are common with financed car insurance policies and can vary depending on the lender and loan agreement.
Lienholders often require:
- Collision coverage: Helps pay for damage to your vehicle after a covered accident, regardless of who is at fault.
- Comprehensive coverage: Helps pay for damage caused by covered events other than a collision, such as theft, vandalism, fire, hail, or severe weather.
In most cases, state-minimum liability insurance alone is not enough for a financed vehicle. If you remove required coverage, your lender may purchase insurance on your behalf and add the cost to your loan, which can be more expensive than maintaining your own policy.
How is a lienholder listed on a policy?
When you finance a vehicle, the lienholder on insurance policy documents is typically listed as an interested party. This allows the lender to receive notifications if your coverage changes, lapses, or is canceled.
In the event of a covered total loss, the insurance company may issue payment to the lienholder first, up to the amount still owed on the loan. Any remaining funds may then be paid to the vehicle owner.
According to the National Association of Insurance Commissioners, lenders may require borrowers to maintain insurance coverage on financed vehicles and may take action if coverage is not kept current.
To learn more about coverage for financed vehicles and also read about what gap coverage is in the Infinity Insurance Agency, Inc. (IIA) Knowledge Center.
Find affordable auto insurance options
If you have questions about a lienholder, financed car insurance, or coverage requirements for a financed vehicle, IIA can help.
IIA works with more than 20 insurance carriers to help drivers find personal auto insurance coverage that fits their needs and budget. Our experienced Spanish-bilingual agents can help you understand your coverage options, answer your questions, and make insurance less confusing.
Call 1-855-478-3705 or get a free quote online today.
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