Liability Requirements of Financing a Car

Auto liability insurance is also referred to as third-party coverage, as it compensates others for losses that occur because of your negligence. Liability insurance includes bodily-injury coverage, which pays the medical expenses and related costs incurred by injured parties. The property damage component pays to repair or replace a damaged vehicle or other property due to a covered loss. Liability insurance does not provide coverage for your own injuries or damage to your own vehicle.

Each state determines the minimum amount of liability coverage its residents must carry when owning a vehicle. However, carrying only the minimum amount probably won't be sufficient when financing a vehicle. According to the Esurance website, many lenders will require higher coverage limits than the state calls for to protect their financial interests in the event of an accident. The coverage requirements can vary from one lender to the next.

While you may have little control over the minimum amount of liability coverage you carry when financing, it's also possible that the minimum might not be enough to meet your needs. For instance, if you are sued successfully, the amount of the judgment could exceed the limits of your policy. According to the Wall Street Journal, a good rule of thumb to follow is to carry an amount of liability coverage equal to the total value of your assets.

The lender can tell you how much liability coverage you need, but not where to purchase it. Because the lender can also mandate that you carry physical-damage coverage, which pays for damage sustained by your vehicle, car insurance on a financed vehicle can turn into a major expense. To find the most affordable coverage that meets your needs, explore a variety of sources. Some insurers offer cheaper rates if you purchase online, for instance. Consider working with an insurance broker instead of an agent who represents only one company, as a broker can offer multiple pricing options.