Does a car loan cover insurance?

Are you confused about whether a car loan will cover your insurance?

In short, whether the car loan covers your insurance or not is dependant upon a number of factors, including whether you buy used or new, and whether you take out an unsecured or secured loan.

According to ASIC, buying a car is one of the biggest single purchases Australians are likely to make, besides your home.

A car loan covers the total cost of purchasing your vehicle, which you agree to repay within a certain time period (the loan term). 

As with any large purchase, it’s crucial to shop around with a budget in mind. Identifying your ideal car can be a complex process, with hundreds of different models, makes and manufacturers to consider.

Depending upon the amount you borrow, your car loan can also be used to cover fees and insurances.

The costs many do not factor in

Before you get a car loan, new or used, it’s crucial that you look further than the advertised cost of the car itself.

You will pay interest on the amount you borrow, along with various fees and charges, and the onus is on you to determine exactly how much that is.

When you create your car loan budget, you need to look at:

• Cost of the car
• Car insurance fees
• Registration fees / stamp duty tax
• Repairs and maintenance
• Fuel & road tolls
• Membership to roadside assistance organisations
• Monthly car loan repayments
• The loan term
• Car loan fees & interest

In other words, buyers and borrowers must consider the full costs of owning the car including the financial liabilities, before determining whether they can afford it.

You can as a borrower, opt to include your first year of car insurance fees in the initial loan, however it is unlikely you will be able to borrow the total insurance cost over the term of your loan.

With an average comprehensive car insurance policy costing between $800-$1200 per year, a five year loan term equates to between $4,000 to $6,000 extra to pay, on top of your loan. This could impact upon your ability to afford monthly repayments, and your application could be denied.

Does financing a car affect your car insurance?

Financing your car can affect your insurance in a number of ways, including the type of insurance you must purchase for your car and the premiums you pay.

If you’ve taken out a car loan, your lender will most likely stipulate the need for comprehensive insurance coverage. This is to ensure they protect their investment, just in case you default on your payments.

Types of Car Insurance

Compulsory third-party insurance (CTP), is a compulsory legal requirement. This covers you for any compensation that you might be liable for if you're involved in an accident and your car hurts or kills other people.

Comprehensive insurance (which is different from CTP) covers you for damage to your vehicle or property, and damage you inflict on other people's vehicles or property.

Let’s say Brianna just purchased a 2010 Toyota Corolla for $6,000, and spent $1000 on repairs, maintenance, registration and financing fees. Brianna lives in an area where there have been car thefts in the past, but after checking the price of comprehensive car insurance repayments - $852/year – she decides to instead pay CTP insurance only.

Two years later, Brianna’s car is stolen. As her CTP insurance only covers damage caused to other cars in a collision, Brianna is not covered. Had she paid the $1704 in insurance, Brianna would have been able to claim back the market value of her car. Instead, she is now left with nothing but the stress of buying another car.

How much will you really pay?

RateCity analysis shows that a car loan of $30,000 over a five year loan term, has an average monthly repayment of $603.68, an average annual fee of $87.63, and an average interest rate of 7.68 per cent.

That equates to $6,222 in interest that you will pay on your loan over the five year term. That’s almost 20% more than your original loan amount.

Comparing Secured & Unsecured Car Loans

Interest rates, fees and loan types can have a significant influence on your monthly repayments.

See how they differ in the table below, where our analysts have compared six low interest car loans currently available on the market, based on a $30,000 loan over five years:

Data accurate as of 30th July 2019.
**Depending upon your personal financial situation, credit score and ability to make repayments, HSBC will create a personalised rate between 8.5 – 16.99% 
As with all financial products, the “best” option for you will depend upon your personal circumstances and financial situation.

What is a loss payee?

If you decide to get a secured loan, whereby the car is used as security against the loan, financiers can seek to be named as a loss payee on your insurance policy. This means that in the event on an insured loss, the financier receives the insurance payout, not you.

Once you pay off your car loan, you can then choose your insurance as you wish, as it is only within the loan term that you must abide by the lender’s procedures.

What is GAP insurance?

Guaranteed Asset Protection/Motor Equity Insurance (GAP insurance) provides an extra level of protection for drivers with a car loan.

GAP insurance will cover the difference between the amount your car insurance pays, and the amount you owe you lender or financier. This is particularly important with newer cars, as you consider the rate of depreciation.

However, be sure to read the fine print in your GAP insurance policies, as many lenders will only pay out when the driver has successfully completed a total loss claim through their insurer.

Things to watch out for:

• Loan protection insurance is often sold as an add-on in car dealerships, to help you make repayments if you experience financial difficulties. Be sure to shop around for loan protection insurance if you wish to take it out, as dealership insurances can have high fees.
• Do not sign any documents when purchasing your loan saying that the car is for business purposes, if you are going to use it personally. If you do this, you will no longer be covered by consumer rights under the credit law.
• Check your lender/financier’s license by calling the ASIC Infoline on 1300 300 630
• Ask for a credit guide before you sign anything. All lenders must provide this guide, which includes their licence number, fees and details of your right to complain
• Struggling to meet your repayments? If you experience financial problems, you have the right to apply for a hardship variation.

If your lender refuses to comply with any of the above issues, you can complain to the Australian Financial Complaints Authority (AFCA) on 1800 931 678.

Compare car loans in Australia