Many drivers interested in buying a car, whether new or used, will finance their purchase. Not only is financing much easier than paying for an entire car with cash, it can also be a smart financial decision if you get a good interest rate. You might find, however, that insurance rates can be a little higher than expected. We'll explain why that's the case.

Lender Requirements

When you buy your car with cash, you own it outright. The title is fully in your name, with no liens and no loans to pay off. Buy with cash, and you have all the freedom to do exactly as you please with insurance, provided, of course, that you meet your state's minimum coverage requirements.

It's not quite that simple when you finance a car. When you finance a car, you'll often find that your lender will have insurance requirements. The reason for this is simple: You're not the sole owner of the car anymore, and the co-owner (your lender) is interested in protecting its investment. Many lenders require low deductibles, which will likely drive up your insurance rate beyond what you might expect to pay if you own the car yourself.

Financing Won't Hurt Insurance Rates

The good news is that drivers who get low deductibles already won't see increases in insurance rates. The simple act of financing a car (versus paying with cash) has no real effect on your insurance rates: If you have a $500 deductible, your rates should be the same whether you've financed the car or you own it outright. Insurance rates will only increase for shoppers who typically have high deductibles or those who usually decline certain types of insurance coverage.

Don't Try to Cheat

It may sound tempting to start off your insurance coverage with the deductibles required by your bank and then increase these deductibles later to save money, but that won't work. Your bank will be listed as a loss payee on the insurance information, and they'll find out about any changes to the policy. In fact, you need to inform your bank about any decision to change coverage, even if you keep your deductibles and switch to a company with lower rates. Otherwise, expect a letter or a phone call asking why you canceled the insurance policy on your car.

Our Advice: Call First

Before buying a car, you should call your lender and your insurance company to get as much information as possible about insurance. Ask your lender what deductibles you'll need, and ask your insurance company exactly how much this will cost you. It might be more expensive than you think.

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Doug DeMuro has a wide range of automotive industry experience, from work at a Ferrari dealership to a manager for Porsche North America. A lifelong car enthusiast, Doug's eclectic vehicle purchases include a Porsche 911 Turbo, an E63 AMG wagon, an old Range Rover and a Mercedes Benz G-wagen.

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