No. You cannot keep only liability coverage on a financed car because lenders require full financial protection for the vehicle until the loan is fully paid. When you finance a car, the lender has a financial interest in the vehicle. This means the car must stay protected from accidents, theft, fire, weather damage, or any situation that can cause loss. Liability insurance does not protect the car itself. It only pays for damage you cause to other people and property. Because of this, lenders do not allow liability only policies. They require both collision and comprehensive coverage to make sure the car stays covered from all major risks.
Drivers often confuse state insurance requirements with lender requirements. States require only liability insurance for legal driving, but lenders require more protection for financed vehicles. If you try to remove collision or comprehensive coverage, the lender can add their own insurance to your loan. This is called force placed insurance and it is usually more expensive than a normal policy. Some lenders may also place the loan in default for not following insurance rules. This can lead to late fees, loan penalties, or repossession in serious cases.
Liability only insurance is allowed on cars that you fully own. Once the loan is paid off, you can choose to remove collision or comprehensive coverage. But until then, full protection is required for all financed cars in the United States. Drivers who fail to maintain proper coverage put their loan, finances, and vehicle at risk. Understanding these rules helps you avoid penalties, extra fees, and gaps in insurance coverage.
The good news is that full coverage can still be affordable when you compare quotes and look for discounts. Many lenders also offer grace periods and loan protections if you need temporary support. The safest option is to maintain the coverage your lender requires until you pay off the car.
Why Liability Insurance Is Not Allowed on a Financed Car?
Liability insurance protects only other drivers. It never pays for damage to your own car. This makes liability coverage incomplete for financed vehicles because lenders want to protect their financial investment.
Here are the main reasons lenders do not allow liability only insurance:
The lender owns part of the car
Until the loan is paid, the lender owns the vehicle with you. They want to make sure the car has enough insurance to repair or replace it if something happens.
Liability coverage does not protect the car itself
Liability covers the other driver when you cause an accident. It does not protect your own car from:
- Collisions
- Theft
- Fire
- Flood
- Storm damage
- Vandalism
You can read more about how weather damage works in our article on weather related insurance coverage.
The lender wants full financial security
If your car gets damaged and you only have liability insurance, the lender loses money. This is why lenders always require collision and comprehensive coverage.
The lender can add force placed insurance
If you remove coverage, your lender can add their own insurance to your loan. This is more expensive and offers less coverage than standard full coverage policies.
What Insurance Is Required for a Financed Car?
All lenders require two types of coverage in addition to liability insurance.
Collision Coverage
Collision pays for damage to your car when it hits another car or a solid object. It applies even if the accident is your fault. This coverage is required for all financed vehicles.
Comprehensive Coverage
Comprehensive insurance pays for damage caused by events that you cannot control. Examples include:
- Theft
- Vandalism
- Floods
- Hail
- Fire
- Natural disaster damage
If you want to understand how full coverage protects a vehicle, you can learn more in our full coverage insurance section, which explains how these protections work together.
Insurance Types and What They Cover
| Insurance Type | Does it protect your car | Does the lender require it | Effect on financed cars |
| Liability | No | No | Insufficient protection |
| Collision | Yes | Yes | Required for loan |
| Comprehensive | Yes | Yes | Required for loan |
| Full Coverage | Yes | Yes | Meets lender rules |
What Happens If You Only Have Liability Insurance on a Financed Car?
If you remove collision or comprehensive coverage, your lender will take action. Below are the most common outcomes.
The lender can add force placed insurance
This is insurance chosen by the lender. It is expensive and gives less protection. The cost is added to your loan payment.
Your loan can enter default
If you do not meet insurance terms, the lender can label your loan as non compliant. This can cause penalties and interest increases.
Your car can be repossessed
Cars can be taken back by the lender if coverage rules are not followed. You can learn more about this situation in our article on repossession due to no insurance.
You may pay for repairs out of pocket
With liability only coverage, you must pay for your own repairs after accidents or weather events. This can cost thousands of dollars.
Why Do Drivers Want Liability Only on a Financed Car?
Many drivers want liability only because it costs less than full coverage. However, once the car is financed, liability only is not an option.
Reasons drivers consider liability only:
- Lower monthly insurance cost
- Older car age
- Financial challenges
- Belief that full coverage is not needed
Even if your car is older, lenders still require full coverage until the loan ends.
How Much Does Full Coverage Cost for Financed Cars?
The cost depends on age, driving record, location, credit score, and vehicle type. On average, full coverage car insurance costs about 1,700 dollars per year in the United States. Liability only costs about 550 dollars per year.
Average Insurance Cost Comparison
| Coverage Type | National Average Cost per Year |
| Liability Only | 550 dollars |
| Collision + Comprehensive | 1,700 dollars |
| Full Coverage | 1,750 dollars to 2,100 dollars |
Your own cost may be higher or lower depending on your driving profile. You can learn how pricing works in our guide on how car insurance prices change by vehicle type.
What to Do If You Cannot Afford Full Coverage on a Financed Car?
If you have trouble paying for full coverage, here are possible steps.
Ask your insurer for discounts
Most insurers offer savings for:
- Good drivers
- Safe vehicles
- Paid in full policies
- Paperless billing
- Multi car policies
Increase your deductible
A higher deductible lowers the monthly premium. Choose only what you can afford during a claim.
Compare quotes from more companies
Shopping around can reduce your insurance cost. Every company prices risk differently.
See if refinancing your car loan helps
Lowering your monthly loan payment can free money for your insurance budget.
Frequently Asked Questions (FAQs)
No. Liability only is not allowed for financed cars. You must carry collision and comprehensive insurance to meet lender rules.
The lender can add force placed insurance or begin default actions. This may increase costs or even lead to repossession.
The lender wants to protect the vehicle in case of accidents, theft, fire, or weather damage.
Yes. Once the loan is fully paid, you can choose liability only.
Full coverage costs more than liability only, but comparing quotes and using discounts can lower the cost.
Conclusion
Liability only insurance is not enough for a financed car because it does not protect the vehicle itself. Lenders require both collision and comprehensive insurance to make sure their financial interest stays safe. If you remove coverage, the lender can add force placed insurance or start loan actions. Once you finish paying the loan, you can choose liability only if you want lower cost insurance. The best approach is to maintain full coverage while you have a car loan. It keeps your finances safe and keeps you in compliance with lender rules. For more guidance on car insurance options and better ways to save money, you can visit Alias Insurance.
