Does having a car loan affect your insurance premiums?

Roman Danaev

A common question we receive is whether car finance affects a person’s insurance premiums. The honest answer is “it depends”. In this article, we’re going to discuss how financing a car can affect how much you have to pay for insurance, including the types of insurance you’ll need to take out.

First of all, having motor insurance is a legal requirement when owning a car in the UK. Even if you don’t drive it often, your car must be insured unless you have officially declared that it is not on the road. This minimum required insurance is called Third Party insurance and this covers the costs of any damages or injuries you cause to another party on the road. Therefore, simply by owning a car, you’re liable to pay insurance.

This is where the distinction between buying a car on finance or buying it outright appears. When buying a car outright, paying the total amount upfront, you’re required to pay Third Party insurance, and any additional insurance you take out is optional.

When buying a car on finance, however, you don’t fully own the car until the loan is paid off, and this can take years. This goes for virtually any type of loan you take out, whether it be a Hire Purchase, Personal Contract Purchase, or a Personal Loan. During this time, the lender acts as a joint owner of the car and therefore will have a vested interest in its protection. As a result, they will often require that you take out further insurance on your car – not only is this insurance on the car, lenders see it as insurance on their investment in you.

There are two other major types of car insurance in the UK. They are Third Party Fire and Theft insurance and Fully Comprehensive insurance.

Third Party Fire and Theft insurance is essentially the same as regular Third Party insurance but with the added benefit of covering your car if it is damaged by fire or stolen. Fully Comprehensive insurance is the most complete type of car insurance available. It covers not only damages and injuries to another party on the road but also damages to your own vehicle and its contents, theft of the vehicle and its contents, fire damage, and your medical bills if you’re involved in a serious road incident. Fully comprehensive insurance is the type of insurance that virtually all lenders will insist you take out as it serves as better protection for the car and therefore their investment. Unsurprisingly, fully comprehensive insurance generally comes with higher premiums than the other types of insurance.

Once you have fully paid off the loan, and are therefore the sole owner of the car, you can change your car insurance as you see fit. Once the lender is no longer involved, you are under no obligation to stick with the insurance they required.

To answer the question of whether having a car on finance affects your insurance premiums, it all comes down to what type of insurance you were going to take out in the first place. Financing a car doesn’t make insurance more expensive, but rather it changes the type of insurance coverage you’re required to take out. If you were going to take out fully comprehensive insurance anyway, then the fact that your car was purchased on finance is irrelevant. If, however, you were only going to take out Third Party insurance, then you’ll be required to take out a more comprehensive insurance plan and therefore have to pay more.

Car finance and car insurance are often far from straightforward, and here at, we pride ourselves on making the whole process as smooth and simple as possible. If you’re thinking about taking out car finance but are concerned about insurance costs, get in touch with our team. We’re more than happy to answer any questions you may have.

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