A Used Car Buyers Guide to Insurance Requirements

If you are making a car payment, you need full coverage car insurance. This protects you and the lender who financed the vehicle.  

When you buy a car, the contract includes an entire page that specifically requires you to buy full coverage auto insurance. Once you sign this page, you handle insurance for the vehicle. 

If you own a car outright — you do not make a car payment — you can legally drive with liability-only policy. 

Why it Matters 

Here at Stonehill Motors in Lake Isabella, we specialize in affordable used vehicles, credit union financing, and buy-here-pay-here (BHPH) autos. Many of our customers are first-time car buyers. Others have owned cars before but are reading a sales contract for the first time.  

Inexperienced car buyers may not fully understand how auto insurance works, or why a used car dealership will require it. 

So, as a California licensed car dealership in Lake Isabella and California licensed insurance agent, we are happy to provide this information for customers, especially those who have little experience buying used cars. 

Read on to discover: 

• About California auto insurance laws for used cars 

• Basic car insurance and car buying vocabulary 

• Why car dealers require full coverage auto insurance 

We’ll begin with a quick look at California law. 

California requires drivers to maintain insurance on their vehicles.

About California Auto Insurance Laws for Car Buyers

California law requires that every vehicle driven or parked on public roads has a minimum liability policy.  

Used car dealerships, and the financial institutions we work with, require full coverage as a part of their contract, but this is not a law. 

Is a Liability-Only Policy Enough Coverage for Your Used Car? 

If you paid cash for a car, and you do not make a monthly car payment to a bank or dealership, you can legally drive with a liability-only policy. 

In legal language, “liability” equals responsibility. Any driver on the road is responsible for damages or injuries they cause to others.  

Liability insurance helps to pay for: 

• Damage you cause crashing into another car 

• Damage you cause crashing into a structure, like a home or fence 

• Medical bills for passengers in another car 

• Funeral costs, if the accident leads to a fatality 

Liability coverage DOES NOT COVER things like: 

• Hail damage 

• Theft of a vehicle 

• Theft of the car’s contents (like a cell phone) 

• A vehicle lost to a garage fire or forest fire 

• Other types of damage caused by a collision 

If your fully owned auto is stolen, for instance, liability insurance WILL NOT pay for it. 

Liability-only insurance will not pay to repair your car.

What is Covered by a Full Coverage Auto Policy? 

A full coverage auto policy includes at least three parts: 

1. Liability coverage (discussed above) 

2. Collision coverage 

3. And Comprehensive coverage 

Collision coverage comes into play when you crash into something. It doesn’t matter if you crash into a home, a garage, another car, or a cow in the canyon on Highway 178. These are all examples of a collision. 

Comprehensive coverage is for everything other than a collision. If a boulder falls in the canyon and strikes your car, or if it is stolen out of Lake Isabella Von’s parking lot, comprehensive insurance will help cover the loss. You will need to pay a deductible, of course. 

And this leads nicely into our next section on vocabulary you should know as a used car buyer. 

Used Car Buying and Car Insurance Words to Know 

Car insurance and auto sales contracts are complex! We know. There is a ton of information in there, and many first-time car buyers don’t understand the language used in these contracts.  

So, here are some important words and their definitions you should know when buying a used car. 

Car sales contracts and insurance contracts can be complicated.

Used Car Contract Words to Know 

Here are some terms to know when shopping for a used car: 

Lienholder: A lender who provides funding for a car. This can be a bank, credit union, or a buy-here-pay-here auto dealer, like us.  

Credit Score: This is one of many tools lenders use to decide how much they will loan you to buy a car. There are three main credit reporting agencies: 

1. Experian 

2. Transunion 

3. Equifax 

They all track consumer credit habits and provide their data to lenders. 

But that is only the beginning! Banks also may use bank records, paystubs, FICO Auto score and other data when deciding how much they will lend, and to whom. 

Credit scores range from very poor, like 350, to outstanding, at 800. You can learn more about your credit score and get help improving it at CreditKarma.com. 

Annual Percentage Rate (APR): This is the amount of interest you pay to borrow money to buy a car. It can range from 0% to 30%, and people with good credit pay less interest than people with poor credit.  

Part of your monthly payment will always be used to pay the interest, and the rest will be used to lower your principal. Banks want their money, though, and usually your first car payments are almost entirely put towards interest. 

Principal: This is the amount of money owed on your used car. If you make payments on time every month, the principal will decrease. You will owe less every month. 

If you make late payments, however, bank late fees can stack up, and your principal will not decrease quickly. 

Principal balance can also increase if a customer does not insure their car. A lender can buy “force placed” auto insurance on your behalf, to protect the vehicle. This is extremely expensive, and the cost is passed on to the consumer, by adding it back on to the principal.  

Remember, if you make a car payment, you need to buy full coverage insurance. 

Down Payment: This is a lump sum of cash given to a dealer at the beginning of the contract. 

Down payments are lump sums at the beginning of a contract.

Amortization Schedule: This paper shows when payments are due, and how much will be owed on the loan after each payment. Of course, you can always pay extra towards your auto loan, and you can always pay it off early, with Stonehill Motors. 

Note that some lenders — but not us, at Stonehill Motors — will charge extra for loans paid off early. Big banks want that money! We at Stonehill Motors want happy customers who will buy more cars. 

Next, let’s explore some important terms in the realm of auto insurance for used cars. 

Auto Insurance Words to Know 

Premium: This is the amount you will pay for auto insurance, your bill. Customers can pay yearly, quarterly, etc. 

Proof of Insurance: Lenders and licensed auto dealers, like us at Stonehill Motors, will require proof of auto insurance.

We need to know that vehicles are protected from theft, vandalism, forest fires, lightning strikes, and all the other things that can happen to a car.

All kinds of damage can happen to cars.

Deductible: This is the amount a customer will pay out of pocket after a covered loss, before insurance kicks in. Deductibles range from $500 to $5,000.  

Here at Stonehill Motors, we require customers to maintain a deductible amount of $1,000 or less. Therefore, it is always a good idea to keep at least $1,000 in the bank, in case something happens to your car.  

Cancellation & Non-renewals: Auto insurance companies can cancel a contract if the premium is not paid on time. They can also non-renew a contract — complete the contract but refuse to send a new one — if they decide a customer is too risky.  

If your insurance is cancelled or non-renewed, you need to find new insurance and provide proof of insurance to your lienholder right away. 

Now that we’ve explored important language, let’s talk about the reasons dealerships and lenders require full coverage auto insurance.

Why Car Dealers Require Full Coverage Insurance 

Vehicles — even affordable used cars  — are expensive. They cost a lot to buy, maintain, fix, and store. 

When a consumer gets a loan for a car, the lienholder loans thousands of dollars to a total stranger. Used car dealers base our decisions on credit scores, pay stubs, reference checks and “gut feelings.”

But dealers and lenders can still get burned on those loans, especially when a car is stolen or totaled in a wreck.  

Full coverage auto insurance helps both the lienholder and the customer rest easy, knowing that if something horrible happens to the car, everyone gets the money they deserve... usually. 

There are times when even a full coverage auto insurance policy does not cover the total financial loss on an auto loan. This is especially true with brand new, very expensive rides, and loans that include a carryover from an earlier loan.  

In those cases, another type of insurance comes into play, called GAP insurance. Stay tuned for our next blog, which explains how GAP insurance works, and helps used car buyers make a good decision to buy or decline GAP coverage on their auto loan.   

Get In Touch with Stonehill Motors, LLC 

As always, we love hearing from you. If you’re looking for a good, affordable used car or truck, or wondering how Stonehill Motors can help you get into a car you can actually afford, get in touch!  

You can leave a comment, email us, or use our handy chat box. We look forward to earning your business for life with our affordable used cars, trucks, SUVs and vans. Remember to bookmark our website and check back often for great deals. Or call today, for awesome prices on great used cars in Lake Isabella, CA.