How Having an Auto Loan Impacts Your Insurance Rate

Quick Answer

Your car insurance company won’t charge you more simply because you have an auto loan. However, your lender will likely require you carry full coverage auto insurance, which will raise your insurance rate.

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Will having an auto loan lead to higher premiums on your auto insurance? Yes, but not directly.

While auto insurers won't charge you more simply for having an auto loan, you will have more coverage requirements, and therefore you'll wind up paying more for car insurance than if you owned your vehicle outright.

Let's take a deeper look at the influence auto loans have on your insurance rates, how auto insurers calculate your premiums and what steps you can take to save money on your car insurance.

How Auto Loans Impact Your Insurance Rates

Your car loan does impact your auto insurance rates, but in a roundabout way. Your lender requires you to meet minimum coverage requirements that can be higher than what you'd select if you owned your car outright.

Most lenders require you to carry collision and comprehensive insurance coverage to protect their investment. If you didn't carry that coverage on your previous car, your premiums will rise with the additional coverage options. However, once you pay off your auto loan and own your car outright, you can choose whether to carry these coverages. As a result, your premiums could be lower.

Collision Insurance

Collision insurance covers any damage to your vehicle resulting from an accident, whether it's your fault or not. You must pay a deductible, typically ranging from a few hundred dollars to $1,000 or more, before your collision coverage kicks in. The average annual cost of collision coverage was $381.43 in 2019, according to the National Association of Insurance Commissioners.

Comprehensive Insurance

Comprehensive coverage pays for the cost of repairing or replacing your vehicle after an accident that doesn't involve another vehicle, such as vandalism, weather damage and natural disasters. Like collision insurance, you'll have to pay a deductible when you file a claim. Comprehensive is less costly than collision insurance, with an average annual premium of $171.87.

Other Factors That Impact Your Car Insurance Rates

Auto insurance companies use numerous pricing factors to determine the risk that you'll file an insurance claim while you are a policyholder. Generally, the lower the risk you represent based on their pricing criteria, the lower your auto insurance premiums will be. Some of the pricing factors insurance carriers use to calculate your car insurance rates are your:

  1. ZIP code: Where you live could affect your car insurance rates, as insurance companies consider the rate of accidents, car thefts and other risks in an area when setting their rates.
  2. Demographics: Auto insurers also look at non-driving factors such as your age, gender, marital status and occupation when assessing risk and calculating rates.
  3. Vehicle: Some cars are stolen more often than others. Similarly, some cars are more expensive to repair or replace than others, and auto insurers set their rates accordingly.
  4. Driving record: Generally, the cleaner your driving record is, the lower your rates will be. Conversely, your auto insurance premiums will be higher if you have a moving violation, DUI or other negative marks on your driving record.
  5. Coverage: Most basic car insurance policies come with liability insurance. Adding comprehensive, collision, uninsured motorist and other coverages may increase your rates.
  6. Deductible: Typically, the lower your deductible is, the higher your premiums will be. One way to lower your premium is to increase your deductible amount, which also means you'll have to pay more out of pocket if you ever have to file a claim.

How to Lower Your Car Insurance

If you're paying more for your auto coverage to satisfy your lender's requirements, take comfort that you can still take steps to lower your auto insurance costs. Here's how:

  • Bundle your policies. If you purchase more than one policy from the same insurance company, such as your auto and homeowners policies, you may qualify for a multipolicy discount.
  • Ask about discounts. Check with your agent to see if you qualify for any discounts for belonging to specific organizations. Many insurers offer lower rates for policyholders who are senior citizens, military service members, federal employees, alumni or affiliated with other eligible groups.
  • Opt for safety and security features. You may be eligible for a premium discount if your car has safety and security features like airbags, antilock brakes or engine cut-off systems. For instance, GEICO offers a discount of up to 23% off on the comprehensive portion of your premium if your car has a built-in anti-theft system.
  • Improve your credit. In most states, companies may legally use credit-based insurance scores when setting your rates. If your credit score is below average, you could pay more for your car insurance policy.
  • Earn good grades. Full-time students with good grades may be eligible for reduced auto insurance rates. Typically, students must be under age 25 and unmarried to qualify.
  • Shop around. Auto insurance premiums vary from insurer to insurer. It's a wise practice to get multiple quotes to help you determine which insurance company provides the best value for you.

Get Auto Insurance Quotes Annually

Hopefully, your car insurance company is serving you well, providing the coverage you need with affordable premiums. In that case, your insurer may deserve your customer loyalty.

Still, it doesn't hurt to research rates from other insurers from time to time to make sure you're still getting the best rate possible. When you get quotes from other auto insurance companies, make sure you're comparing apples to apples by requesting a quote for the same type of coverage, limits, deductible amount and other policy options.

Experian can help you compare auto insurance offers and potentially snag a lower premium. If another insurer quotes you a lower rate for the same coverage you have now, it may make sense to switch insurance providers to reap the savings.

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