Many people wonder why their insurance agent asks for the name and address of the bank or loan company that provided the funds to buy their car. Are they just snooping, or is there a reason behind the question?
Okay, let’s say you go down to your neighborhood grocery store one day, and—low and behold—there is a car dealership set up in the parking lot selling new cars. And you came home with a beautiful new car (I know someone this happened to!) Now, you didn’t take enough cash with you—after all, you were only going to the grocery store—so the friendly car salesman arranged a loan for you in addition to taking your old clunker off your hands.
Now, how much money do you have invested in that new car? Probably only the amount of your trade in, right? So, maybe $2,000. How much money do you think the bank or loan company has invested in your beautiful new car? On average these days, a new car will cost somewhere between $20,000 and $25,000. So, you invested $2,000, and they invested, let’s say, $23,000.
What would happen if you were to have an accident the following week, and in the accident, you totaled out your nice, beautiful new car? Well, if you have insurance, and you included gap coverage to take care of the difference between the cost new and the depreciated value, you would be out your deductible—we’ll say it’s $500, plus your trade-in that you no longer have. And the loan company or bank would be out the $23,000 they shelled out for your car. UNLESS they were shown on your insurance policy as lienholder.
Loan companies and banks don’t like to lose money, so they insist that people who borrow money from them insure the items purchased with the borrowed money—in this case, your beautiful new car. When you add their name and address to your insurance policy as lienholder, the insurance company knows that financial institution has what is called an “insurable interest” in the hunk of precious metal you drive down the road. In the event of a covered loss, the bank or loan company gets paid FIRST to pay off that loan.
And that, boys and girls, is why insurance agents ask for the names and addresses of banks and loan companies when you have loans on cars!