My Car Has Been Repossessed: How Does This Influence My Car Insurance?
Repossession of a vehicle and liability insurance coverage are two separate issues although each influences the other in practical terms. If your vehicle has been repossessed, there are insurance implications that you should consider in determining how much liability you might have in the situation and how long you should keep your current coverage.
Insurance Coverage During Financing
Most lenders demand that the buyer of a vehicle keep full coverage insurance on the car until it is paid off. To fail to do so is to violate the terms of the agreement between the lender and the borrower and can result in the lender assessing a cost against the borrower to pay for full coverage insurance. This is usually in the form of a surcharge in addition to the regular payment.
Why are lenders so insistent on having financed vehicles insured? Lenders are already taking a substantial risk by financing vehicles to begin with. If the borrower does not pay for the vehicle, the lender must repossess and sell the car in order to recoup its losses. This means additional expense in repossessing the car as well as disposing of it. In the end, the car’s depreciation may mean that the lender never recovers the full value of the loan and must pursue the residual from the borrower, necessitating even more expense.
Because repossessing a vehicle is so costly, lenders do everything they can to avoid having to spend even more money on a car that is wrecked or even totaled before they can repossess it. Therefore, lenders will keep insurance coverage on a vehicle if the borrower refuses to do so then pass the cost along to the borrower.
Paying for Insurance on a Car Not In Your Possession
Normally, a car’s insurance coverage is held by the person who has possession of the vehicle. However, when a vehicle is financed, the proceeds of an insurance settlement go first to the lender to pay off the car’s outstanding balance then to the individual who owns the car.
If the car is not in the owner’s possession due to repossession action by the lender, however, the situation becomes murkier. A person who has had his or her car repossessed may not have been able to make insurance payments for some time.
Assuming that the car is insured, when does the owner stop being responsible for the car’s condition: during the repossession process or after the car is sold? What happens if the car is damaged during transit or storage by the repossession company?
In most cases, the wisest course of action for the owner of the car is to maintain liability coverage until the car is sold. The reason for this is simple: while you have control over your own insurance coverage, you have none over the coverage that may or may not be offered by the repossession company. If you are able to maintain coverage on your vehicle until you receive notification that the car has been sold, it is usually to your legal advantage in order to avoid liability issues to do so.
However, the lender may also maintain coverage on the vehicle as well as the repossession company. In that case, your coverage may be redundant once the vehicle is out of your hands.
How Does A Repossession Affect My Future Insurance Rates?
Theoretically, a repossession has nothing to do with your insurance rates as the repossession is a financial issue and not a liability issue. The repossession costs the insurance company nothing and, as previously noted, may benefit the insurer by having multiple coverage for a time on the same vehicle.
Despite this fact, you may well find that your insurance rates go up after a repossession if you attempt to insure another vehicle. This is because a repossession has a devastating effect on your credit rating and this effect will last for at least seven years. Many insurance companies are now looking at credit ratings when they assess auto insurance costs; the lower your credit rating, the more money you will pay for auto insurance.
Not all states allow this practice, however. If you live in a state in which credit rating is one of the factors allowed in determining your auto insurance rates a repossession will have a significant impact on your cost to insure your next vehicle.
However, if your state is one that does not allow this practice, the repossession should have no effect whatsoever on your auto insurance costs.