A lien by definition is a list of demands placed on a piece of property or asset to satisfy a debt. There are two types of liens, voluntary and involuntary. The former is the more common usually set up by a financial institution and the latter is less frequent and usually mandated by the IRS for the payment of taxes. Voluntary liens can include extra demands on car insurance coverage and even require proof of regular maintenance performances. Involuntary liens demand that the tax amount owed be paid or at least arranged to be paid in full within a certain amount of time or the property will be seized.
In the more common case of voluntary liens, vehicle lienholders and car insurance companies work hand-in-hand with one another in defining your coverage requirements. Your state legislature requires certain minimum levels of protection, but if a lien is involved, the lienholder may stipulate higher levels of insurance as outlined in the agreement.
How are they allowed to do this? The lienholder or financing institution holds the title, proof of ownership, for the vehicle until the borrower pays the amount borrowed in full. And in most instances, lienholders look to protect their investment by demanding higher amounts of state required insurance coverage, a broader range of insurance coverage and even lower deductibles. This practice is legal according to the state legislature. Reasoning is that you are not only buying insurance to protect your own interests, you are buying insurance to protect the interests of your lienholder institution as well.
Minimum state requirements for auto insurance may include and are not limited to liability, property damage, personal injury and uninsured/underinsured motorist coverage. Finance companies routinely increase the state required amounts of these types of protection. Common additional items which lienholders require include collision and comprehensive insurance. In some cases, financial institutions want to be sure they will be fully compensated in a total loss accident by making you buy “full coverage” insurance for more than the car is actually worth.
So how does all this affect your insurance premium when you chose to finance your car? Car owners pay roughly twice as much for their car insurance than the average state minimum policy. There are only a select few groups of people who can afford to make an outright purchase of a new vehicle and circumvent the lienholder process. But those fortunate few can afford the insurance on the car too. Most people need to use financing to get a car. If you fit into that large pool of people, be prepared to pay more than you expected for your car insurance.