Used cars need insurance, too

Justin Stoltzfus

More consumers are willing to buy used cars instead of new ones, according to a January 2011 Consumer Reports survey. Two-thirds of those surveyed said they were more likely to consider a late-model used car for their next purchase than they were several years ago

Buying a used car can save you thousands. It also will spare you the depreciation that hits drivers the moment they drive a new car off the lot, according to Edmunds.com. But the cost of owning a car is more than its sticker price: Don’t forget to factor in the proper auto insurance coverage.

Do used cars need insurance?

If you’ve financed your car through the dealership or bank, some of the biggest decisions about insurance may already be made for you — and you’ll have to buy whatever coverage your lender requires until you’ve paid off the car.

It’s a little different for those who own their used vehicles “free and clear.” If you’ve paid for a used car upfront, you won’t have to follow a lender’s rules. You do, however, have to follow your state’s laws. Most states require car owners to buy certain amounts of liability insurance, which covers injuries you cause to others on the road and the damage you cause to others’ property.

Collision and comprehensive coverage

Beyond your state’s required minimum liability insurance, your auto insurance company offers various optional types of coverage — like collision and comprehensive coverage. Collision coverage pays for damage to your car if it collides with another car or object. Comprehensive coverage pays for damages from theft, vandalism or inclement weather. Often, these types of coverage come with a deductible — the amount you have to pay out of pocket before insurance coverage kicks in.

Whether you need these optional types of coverage depends on the value of your used car. Allstate recommends determining the actual cash value of your vehicle. That, minus the deductible, is the maximum payout you’ll get from your insurance company. If you’re paying more in premiums than what your car is worth to your insurer, you’re not getting a good deal.

Progressive recommends taking your savings into account. If you have enough cash stored up, you might be able to pay for damages out of pocket and save yourself the cost of premiums.

GAP coverage

Not all used cars are clunkers — and financing a late-model vehicle might let you drive away with much more car than you could afford to pay for in cash. But things can be tricky when it comes to auto insurance. As a car depreciates, some buyers find themselves owing more than the vehicle is worth on the market, a condition referred to as being “underwater.”

Guaranteed asset protection (GAP) insurance covers the difference, so that if your car is totaled, you get a check that lets you off the hook for your entire debt, not just value of your vehicle set by the insurance company, according to Edmunds. Many used car owners don’t need this additional safeguard, but for those who have financed vehicles at high interest rates, GAP can be worth it, according to Edmunds.