3 Big Reasons Drivers With Auto Loans Could Pay More for Car Insurance

Owning a car is expensive. Costs include the vehicle itself, plus registration fees, gas, routine maintenance, and auto insurance. And for drivers with auto loans, car insurance requirements are often steeper than the state minimum coverage.

Lenders need to protect their investment, so they often require these drivers to carry three additional protections that aren't required by state law. Here's a closer look at them.

1. Collision coverage

Collision coverage pays for damages to the policyholder's vehicle if they cause an accident or are involved in a one-car accident -- for example, if they run into a tree or a utility pole with their car. Lenders require this coverage because it ensures they get their money back, even if the car is totaled in a crash.

The average cost of collision insurance is $290 per year, according to the Insurance Information Institute (III). But rates vary significantly by make, model, and the driver's location. Cars that were more expensive to purchase or that have rarer parts cost more to repair, so their collision coverage will cost more. Similarly, in areas where auto repairs cost more, drivers pay more for collision coverage.

2. Comprehensive coverage

Comprehensive coverage pays for damages to the policyholder's vehicle due to problems like:

• Animal-vehicle collisions
• Natural disasters
• Vandalism
• Theft
• Tree branches falling on the car

In short, it covers damages to the vehicle that aren't covered under collision protection.

It's another one lenders require to protect their investment. The III estimates that comprehensive coverage costs about $134 per year. But again, a lot depends on the car and location. Areas where auto theft is common or where natural disasters strike frequently will pay more for comprehensive coverage than those in quieter parts of the country.

3. Gap coverage

Gap coverage pays the balance of the driver's auto loan if the car is totaled in a crash and the depreciated value of the car isn't enough. For example, say a driver has a $20,000 auto loan and after a year, the driver totals the car. Collision coverage pays up to the car's value at the time of the accident, which was only $16,000. Gap coverage would kick in the additional $4,000 here to pay off the loan so the policyholder wouldn't owe this out of pocket to the lender.

It's possible to purchase gap insurance through a car dealer, but this is often more expensive than adding it to an existing car insurance policy. Getting gap coverage through a traditional car insurer only adds about $20 per year to the average annual premium, according to the III.

What this means for drivers

Lenders typically require drivers to provide proof of the above protections before they will approve the auto loan. Skipping it isn't an option because the lender could repossess the vehicle if the owner fails to maintain appropriate insurance coverage.

Because of this, drivers with loans will have to purchase higher amounts of car insurance than their state requires. This isn't necessarily a downside, though. More insurance coverage means fewer out-of-pocket costs for policyholders in the event of an accident. Even without an auto loan, drivers may want to purchase collision and comprehensive coverage so they don't have to pay to replace their own vehicle if they get into a crash.

If budget constraints make this difficult, try comparing rates from several companies to see which offers the most affordable car insurance. Just be sure to notify the lender when changing insurance providers so it doesn't think coverage has lapsed completely.