Your guide to car insurance for a financed car

Many people in the UK choose car finance as a convenient way to purchase a new car without having to pay the full amount straight away. Car insurance for financed cars is no different than any other car insurance - regardless of whether you are buying a car upfront or financing it, you need to have insurance. Car insurance not only safeguards you, your car, and other road users, but it's also legally required in the UK if you own or drive a vehicle.

In this guide, we will break down everything you need to know about how car insurance works for financed cars, from the cover you will need to how much you should expect to pay.

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How does car insurance work for financed cars?

Car insurance is essential for financed vehicles, and typically comes with specific requirements to protect both the borrower and the lender. A car finance agreement is a legally binding contract between you and the finance company, determining repayment terms based on your financial situation. Lenders typically require comprehensive coverage to safeguard their investment, while options like GAP insurance can protect you from financial shortfalls caused by depreciation.

Additionally, some lenders may offer bundled finance and insurance packages, but these could limit flexibility. Understanding these key elements helps you ensure both financial security and peace of mind while driving a financed car.

Types of car insurance cover

There are three main types of car insurance you can protect your financed car with, each providing different levels of cover:

Third-party only insurance

The bare minimum legal level of car insurance you can have in the UK is third party. As the most basic form of insurance, it only covers damage to other vehicles and property. While it meets legal requirements, in most cases it won’t be enough for financed vehicles, as lenders normally require more comprehensive cover.

What it covers:

• Third-party damage – Liability for vehicle or property damage you cause to others.

• Injuries - caused to others including your passengers.

What it doesn’t cover:

• Your own car – No protection for theft, fire, or any damage to your vehicle.

• Personal injury – Medical costs for you or passengers are typically excluded.

Third party, fire, and theft insurance

Third-party, fire & theft (TPFT) insurance is the next level up of cover. This type of insurance protects you against major risks like theft and fire as well as covering damage you cause to others. It’s sometimes accepted for older or lower value financed cars, though many lenders still prefer comprehensive policies.

What it covers:

• Third-party damage – Costs if you injure someone or damage their vehicle/property.

• Fire & theft – Compensation if your car is stolen or damaged by fire.

What it doesn’t cover:

• Your own car’s repairs – No coverage for accidental damage you cause (e.g., if you crash into a wall).

• Weather or vandalism damage – Only fire and theft are included, not other non-collision incidents.

Comprehensive car insurance

Comprehensive car insurance is the most extensive coverage available and is typically required by lenders for financed vehicles. It offers the highest level of protection, ensuring both you and the lender are protected against financial loss. This type of insurance covers nearly all risks, including accidental damage to your car, theft, fire, and liability for injuries or damage to others, regardless of fault. Additionally, it takes into account the car's current market value when determining insurance payouts.

What it covers:

• Accidental damage - to your car or someone else’s.
• Injuries - caused to you or others, including your passengers.
• Theft - Full coverage if your car is stolen.
• Fire damage – Full coverage if your car is damaged by fire.
• Vandalism - Covers damage to your car caused by vandalism.

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Why do financed cars typically require comprehensive cover?

When you finance a car, you're not just getting a new ride—you're committing to a financial agreement that requires thoughtful planning and protection. Comprehensive car insurance is often a mandatory requirement for financed vehicles, and for good reason. It’s not merely a formality; it acts as a safeguard for both you and your lender.

Comprehensive coverage provides broad protection against risks such as theft, vandalism, and accidents, regardless of who is at fault. This is particularly important because, until the loan is fully repaid, the lender technically still owns the vehicle. They have a vested interest in ensuring it is protected from potential losses, and comprehensive insurance serves as the most effective way to do this.

Does car finance include insurance?

In some cases, car finance deals may include insurance. This is more commonly available when purchasing a new car, although some car finance brokers also offer combined deals for used vehicles. In this case, your monthly insurance premium would be combined with your car finance repayment. Some packages even include servicing, which can also be added to your monthly payment.

Such deals might appeal to those who prefer the convenience of consolidating their bills into one payment. However, keep in mind that opting for an all-inclusive package could limit your choice of policies and may prevent you from customising the insurance to fit your specific needs.

Guaranteed Asset Protection (GAP) insurance

Since the value of a car depreciates over time, the insurance settlement after an accident or theft might not fully cover the car's depreciated value remaining on your finance agreement.

For example, let’s say you buy a car for £20,000 using a finance agreement. After 2 years, you get in an accident and the car is written off. Your insurance company values the car at £12,000, but you still owe £15,000 on your finance agreement, leaving you with a £3000 shortfall. Since comprehensive insurance only covers the current value of the car, in the case of an accident you would be responsible for paying the difference to the lease company yourself.

This is where gap (Guaranteed Asset Protection) insurance comes in – this is an optional policy which covers the difference - £3000 in our case - ensuring you’re financially protected, effectively ‘plugging the gap’ between the car's market value and the outstanding finance amount. It is worth checking with your insurer whether gap insurance is included in your policy, and consider adding it onto your policy if it isn’t already.

What types of gap insurance are available?

Much like standard insurance, there are several kinds of gap insurance to choose from, depending on your circumstances:

• Return to Invoice (RTI) Insurance: RTI insurance covers the difference between the price you paid for the car and your insurer’s payout. It helps safeguard the money you’ve invested, such as a cash deposit or part-exchange value.

• Vehicle Replacement Insurance: This type of insurance bridges the gap between your insurer’s payout and the cost of purchasing a like-for-like replacement vehicle, making it ideal for getting back on the road quickly after your car is written off.

• Finance Gap Insurance: Specifically designed for cars purchased on finance, this coverage protects against shortfalls when the car’s current market value is lower than the outstanding balance on your finance agreement. Without it, you would still owe the finance company even if the car is no longer yours.

• Contract Hire Gap Insurance: If you’re leasing a car, contract hire gap insurance covers any outstanding lease payments if the car is written off. While your standard insurance covers the car’s current value, this type of gap insurance takes care of remaining lease obligations.

Factors affecting insurance premiums for financed cars

When it comes to car finance insurance, your premium is calculated based on a number of factors, including your individual circumstances. The amount you’ll pay will depend on things like:

• The car’s make and model

• Driver profile – your age, driving history and experience will all affect the cost of your insurance. Younger drivers, for example, may face higher premiums

• Location - where you live will also affect your insurance cost

• Your annual mileage

Car finance and insurance for young drivers

If you are a younger driver and looking to buy your first car, car finance can be a good, affordable alternative to buying a car upfront. Just like with any car however, insurers will view drivers aged 18 to 24 as higher-risk, leading to increased premiums. Additionally, younger individuals are often considered a riskier investment due to limited credit histories, resulting in finance being offered at higher interest rates.

However, there are still tailored products designed for younger drivers, combining finance and insurance into one manageable and cost-effective monthly payment.

Is insurance higher for financed cars?

Given that lenders typically require comprehensive cover for financed cars, you will automatically be paying more for the top level of cover, which can lead to higher monthly payments. And if you add gap insurance, this could further increase the cost.

Lastly, if you opt for a package that combines car finance and insurance, it might limit your ability to explore other options and secure the best price, potentially making it more expensive in the long run.

Finding the best insurance deals for financed cars

Here are some of the ways you can find the best insurance deals for financed cars:

• Consider your needs and budget when choosing an insurance policy.
• Look for discounts and promotions that can help reduce costs.
• Read reviews and ask for recommendations to find a reputable insurance provider.
• Shopping around can help you find a competitive price for your car insurance.

Don’t just settle for the first quote you receive; Howden can help you explore different options to ensure you’re getting the best cover at the best price. Contact us today.

Quick-Fire Summary: Car Insurance for Financed Cars

• Car insurance for financed cars is essential, ensuring legal compliance and protecting both you and your lender.

• Comprehensive coverage is typically required, offering protection against theft, accidents, and damage.

• GAP insurance can bridge the gap between the car's depreciated value and the outstanding loan balance, preventing financial shortfalls.

• Some lenders provide bundled finance and insurance packages, combining both into one monthly payment, but these may limit customisation and flexibility.

• Premiums for financed cars are influenced by factors such as age, location, vehicle type, and coverage level, with higher costs for comprehensive policies.

• Young drivers may face increased insurance costs due to higher risk assessments and limited credit history, though tailored finance and insurance products are available for more manageable payments.