How Buying a Car on EMI Affects Your Car Insurance

It may have happened that you saw your favourite car model in the showroom and decided to buy it right away. During payment, you may have opted for the EMI, or Extended Monthly Instalment, option to avoid the financial burden of paying the entire amount at once. Along with the car, you may have bought the private car insurance policy also. But, was choosing the EMI option or getting a car loan a good decision in terms of insurance premium? How does a car loan affect insurance premiums? Here’s everything you need to know.

An EMI consists of the principal and interest on the loan, and you have to pay a fixed amount every month as part of the loan repayment. You pay the interest throughout your loan tenure, which usually lasts up to 3-4 years. Although there is no direct relation between a car loan and the car’s insurance premium, you may still end up paying a higher insurance premium for your car depending on the lender. Some lenders are okay with the borrower buying a basic mandatory car insurance policy cover, such as third-party liability insurance for the car. Meanwhile, some may ask for additional covers such as an own-damage (OD) or comprehensive car policy.

The features of a third-party policy are:

• It is mandatory
• The premium is low and affordable
• The rates and charges are fixed by the Insurance Regulatory and Development Authority of India (IRDAI)
• The insurers do not have any control over the premium
• In the face of a mishap, the policy covers only the third-party losses and any legal liability, even if you were at fault
• It does not cover any damage to your car

To ensure financial coverage for any damage to your car, you need to get an OD or comprehensive policy.

• These policies cover both accidental and non-accidental damages to your car
• The non-accidental damages include damages due to natural calamities such as floods, storms, earthquakes and manmade activities like riots
• The insurers decide the premiums for these policies
• The premiums can vary from one insurer to another
• The premiums would always be more expensive than that for third-party policies
• You can buy add-ons with these policies to increase the extent of coverage

You will find that some lenders insist that you get an OD or comprehensive policy and add-on covers. The reason is that your lender has ownership of your car or is a joint-owner until you repay the loan. The lender would always try to ensure that the car is insured against any damage due to accidents or other causes. Plus, they would not want the value of the car to decline, thus increasing your total cost towards the car in the following ways:

• Payment of EMI every month towards loan
• The premium of third-party compulsory car policy
• The premium for OD or comprehensive policy
• Additional premiums for add-on covers if any

If you cancel the comprehensive policy after having purchased it, you may face problems. Your insurer will have everything on record, including details of your lender. You need to disclose all the facts while purchasing insurance. However, the lender can find out about the policy cancellation through the RTO (Regional Transport Office) or other sources. If this happens, it would violate the terms of the loan on your part, and you may be charged with a penalty. The lender can undertake the following actions against you:

• Reduce the duration of repayment of the loan
• Increase the monthly EMI amount
• Sell off your car as the lender has a legal right over it
• Take legal action against you

Within the repayment period, you cannot drop the policies without your lender’s approval. However, you can reduce the premium amount by:

• Buyingcar insurance online

You may get adiscount from your insurer for the online purchase of the policy. The insurer gives this discount as there would be no agent or broker involved. This would lower the policy premium to some extent.

• Accumulate NCB (No Claim Bonus)

NCB is a reward offered to the insured by the insurer for not making a claim during the policy term. It will reflect in your policy document after completion of a claim-free year and can be used as a percentage discount on the next policy premium at the time of renewal. This would happen for each claim-free year up to a certain limit.

Buying a car on EMI does not have any direct consequence on your car insurance. In certain cases, it can indirectly affect the total premium amount that you have to pay. But there are also ways to reduce the premium amount without violating the terms of the loan.