If My Car was Repossessed, What Happens With My Insurance?

What happens when your car gets repossessed and what happens to your insurance? If your car has been repossessed, then it typically means you missed a car insurance payment.

If you missed a car coverage payment, then chances are also high that you’ve missed a recent insurance payment. In this situation, your lender’s auto insurance may apply, and you may be forced to pay a higher car payment.

So your car has been repossessed. You have auto loan on your vehicle. But what happens to that policy now?How does a vehicle repossession affect car coverage prices? Can you safely cancel your previous personal lines insurance policy after a vehicle repossession? Will your insurance provider look negatively upon a auto repossession? These are all excellent questions. We’re about to answer them.

Are you required to have full coverage on your vehicle until it’s paid off?

First, let’s make something clear: when you’re leasing a vehicle or making car payments, then you don’t fully own your vehicle. You have a loan contract to keep your loan current and stick to your payment plan.

You must make on-time loan payment, or you’ll have a delinquent loan, and that means your vehicle can be repossessed. The car dealership or their finance company partly owns your vehicle. That car loan lender, in most situations, requires you to keep full coverage on your vehicle until it’s paid off.

If you fail to maintain adequate insurance coverage on your vehicle, then you’re violating the terms of the agreement between the lender and the borrower. At this point, the lender may require the borrower to pay for full coverage. You might also see a surcharge on your next car payment.

The reason lenders require full coverage is simple: lenders are already taking a substantial risk by financing a vehicle.

Vehicles can get stolen. They can be destroyed in an accident. They lose their value over time. Lenders can miss payments. For all of these reasons, it’s understandable that lenders require an extra layer of protection on the asset being used as collateral – the vehicle.

If you, the borrower, can’t make a car payment, then the lender needs to repossess the vehicle and sell the car to recoup its losses. In many cases, the lender will never recover the full value of the car loan, especially when considering the costs of car repossession, selling the vehicle, and securing the residual from the borrower.

Ultimately, repossessing a vehicle is costly, and that’s why lenders try to avoid it whenever possible. It’s better for a lender if a vehicle is wrecked, totaled, or stolen before they can repossess it.

In these situations, insurers will cover the losses. Even if the borrower refuses to put full coverage on a vehicle, the lender may choose to do so and then pass the costs along to the borrower.

What happens after a repossession?

We’ve explained how insurance works on a vehicle you’re financing or leasing. Now, it’s time to look at the car repossession process.

What happens when you have coverage for a vehicle that has been repossessed after a loan default?

Normally, a car’s coverage is held by the person with possession of the vehicle. However, this isn’t the case when the vehicle is financed. In this situation, the proceeds of a settlement will first go to the lender to pay off the vehicle’s outstanding loan balance and then to the individual who owns the vehicle.

Should you maintain basic liability coverage after repossession?

If your car has been repossessed by the lender, then the situation becomes a little complicated. If your car has been repossessed, then it typically means you have a missed payment. If you missed a policy payment, then chances are also high that you’ve missed a recent payment. In this situation, your lender’s auto policy may apply, and you may be forced to pay a higher car payment.

In other cases, you’ve missed a car payment, but your policy is still active. In this case, it’s in your best interest to continue maintaining car coverage until after the car is sold by the lender.

The reason you want to keep car coverage on a repossessed vehicle is simple: you have full control over the car insurance policy you choose, but you don’t have as much control over the policy chosen by your lender (or the repossession company). Ideally, you’ll maintain coverage on your vehicle until it has been sold or you pay off your balance and the repossession costs.

Can you check with the repossession company to make sure your car insurance isn’t redundant?

There are situations where you may not want to continue paying for car insurance on your repossessed vehicle.

Sometimes, the repossession company will insure a vehicle under their own plan as soon as it’s in their possession. In this situation, your coverage may be redundant once the vehicle is out of your hands, in which case you may get no advantage from maintaining your own liability coverage.

Will a repossession raise your rates in the future?

A repossession is a financial issue – not a liability issue. Repossession doesn’t require a claim to your insurance and it doesn’t cost your insurance company anything. Theoretically, it shouldn’t increase insurance rates.

Unfortunately for you, your insurance rates will almost certainly increase after a repossession. That’s because a repossession will devastate your credit score. Your credit score has a significant impact on your car insurance.

Fortunately for you, some states make it illegal to use credit score as a factor when determining insurance prices. In these states, your insurance premiums are unlikely to increase after a repossession.

What’s our conclusion?

A vehicle repossession can be messy. If your vehicle has been repossessed, then you’ll typically want to maintain basic liability coverage on the vehicle until it is sold. Once it’s sold, you can cancel coverage by sending in your insurance cancellation letter. The only exception is when the repossession company applies their own insurance to the vehicle after taking possession, in which case your coverage will be redundant and you can freely cancel it.