Many consumers rely on automobile loans to acquire a vehicle; after all, not many people can afford to dish out tens of thousands of dollars. But when taking out a loan to purchase a car, there are usually auto insurance requirements attached to the agreement. Lenders often require that borrowers maintain comprehensive and collision coverage on vehicles to insure against losses suffered by the financed car. In addition, a lender may also require a borrower to choose a specific (or minimum or maximum) deductible, often 500 or 1000 .

The deductible that's required by a lender can be dependent on the type of financing. Usually, if a vehicle is being financed for a purchase, the financial institution will allow a borrower to choose a deductible as high as $1,000 ("1000 deductible auto insurance"). If a consumer is leasing a vehicle, the bank may require a deductible amount of no more than $500 ("500 deductible auto insurance"). Additionally, leasing agreements often require lessees to carry higher liability limits.

Motorists who lease a vehicle in California may have to carry auto policies that include limits of 100/300/50 even though California auto insurance laws only require 15/30/5. Depending on the driver and vehicle, this could cause quite an increase in premium.

Why Do Lenders Require Specified Deductibles for Financed Cars?

A lender owns a vehicle until the loan has been paid off, and, therefore, any damages that are sustained by the automobile will be caused to the lender's property. There are some car insurance companies that offer deductibles up to $5,000, and if a policyholder were to choose that amount, he or she may be inclined to allow the vehicle to be repossessed instead of having to pay such a large amount toward repairs. If this were the case, the lender would have to pay the $5,000 deductible to have the automobile repaired.

Consumers who decide to lease a vehicle will usually be required to choose a $500 deductible. The reason for this is that the lessee does not have any ownership in the vehicle, and if it were to be damaged or stolen, he or she may have no interest in paying a deductible of $2,500 or $5,000. In this case, if the lessee were to abandon the lease agreement due to the vehicle's suffering a loss, the leasing company would need to pay only $500 toward the loss rather than $1,000 or more.

The reason leasing companies may require higher liability limits is that they are the owners of the leased vehicles, and if lessees were to cause damages or injuries while driving, the responsibility could be pinned on the owner (the leasing company). By requiring higher limits, the bank protects itself against having to pay for damages or injuries that exceed state minimums.