What happens if you wreck a financed car without insurance?

If you’re in a car accident and the cost to fix your car is more than it’s worth—or it’s beyond repair—an insurance company would likely call it a “total loss” and pay you what the car is worth. But what if you don't have car insurance and you still owe money on the car? In most cases, not only are you looking at having to buy a new car, but you’re also still on the hook for the loan, and maybe even some legal fees. Let's break it down.

Crashing a financed car without insurance: What you need to know

Let’s start with this: it’s pretty much impossible to have a financed car without car insurance. Whether you own, lease, or finance, car insurance is mandatory for all drivers in Canada. For financed cars, your lender will also require proof of insurance as part of your finance agreement to protect their investment since the car is technically theirs until you’ve paid it off.

But what happens if you’re at fault in an accident and don’t have insurance?

If your insurance has lapsed and you’re involved in a car accident with a financed car, you’re driving illegally and could face serious consequences. These include hefty fines, licence suspension, vehicle impoundment, and even jail time. Here's what you need to know:

Violating your loan agreement

Even if you’re making your car loan payments on time, not having insurance violates your agreement. Lenders usually work closely with insurance companies to make sure your policy stays active throughout the loan term. The lender is usually notified if your insurance is cancelled or becomes void, like for nonpayment. Since keeping insurance is a requirement of your loan agreement, letting it lapse is considered a violation. This gives the lender the legal right to repossess your car to protect its investment and recover its losses.

On top of that, you'll also be responsible for paying back the rest of your loan. Some lenders might demand full payment right away (and maybe even sue you for it), while others might let you set up a payment plan. Either way, you’re still on the hook for the remaining balance on your loan. So, now you're out of a car and potentially a lot of money.

Out-of-pocket expenses

As for the car itself, if it's repairable and, by some chance, the lender doesn't try to repossess it, you’ll need to cover the repair costs yourself, as well as any medical bills for injuries to you or your passengers. If your injuries are serious enough to keep you from working, you won’t have access to income replacement benefits, leaving you without financial support during recovery.

And that’s just in the case of a single-car accident without insurance. If you cause an accident involving another driver, you’ll be personally responsible for all related costs. This means potentially paying for repairs or replacement of the other driver’s vehicle, their medical costs, any legal fees, and any other accident-related expenses. If you can’t afford these costs out of pocket, you could be sued, and your wages or assets might be garnished to cover the damages.

Insurance complications

Finally, without insurance, you’ll likely run into trouble getting coverage in the future. Many insurers see drivers without prior insurance as high-risk, which can lead to higher premiums or make it harder to find a policy.

What if the other driver caused the accident, but you don’t have insurance?

Normally, if the other driver is 100% at fault for the car accident, their insurance would cover the cost to repair or replace your financed car and handle your medical expenses. However, because you were driving without insurance, that won't be the case.

Without insurance, you’ll be responsible for covering the repairs or replacement of your vehicle. The other driver’s insurance may still cover their car and any injuries they caused you, but you won’t have access to your own accident benefits, which means no help with medical costs or income replacement if you’re unable to work. And if you try to sue the at-fault driver for additional compensation, it could be denied because you were driving uninsured.

On top of all that, again, driving without insurance violates your financing agreement. This gives your lender the right to repossess your car and sue you for the remaining balance of the loan, which could leave you in a serious financial bind. It’s a situation that can snowball quickly, making insurance absolutely essential when financing a car.

So, what insurance do you need for a financed car?

When you finance a car in Canada, you’re generally required to carry “full” coverage. This includes a minimum of third-party liability insurance and accident benefits coverage; it also typically includes collision and comprehensive coverage.Liability insurance helps cover the costs if you’re at fault in an accident, including property damage, medical expenses, and other losses for anyone injured, up to your policy’s limits. Accident benefits coverage takes care of you, your passengers, and even pedestrians injured in a collision, covering things like medical bills, rehabilitation, loss of income, and more.

Then, depending on your province, you might also need additional mandatory coverage, like uninsured motorist coverage or direct compensation-property damage (DCPD) coverage, to meet local car insurance requirements.

On top of these basics, “full” coverage typically includes collision and comprehensive coverage. Collision coverage helps pay for repairs to your car after an accident, whether it’s a single-vehicle crash or one involving another car. Comprehensive coverage takes care of non-accident-related damage, like theft, vandalism, fire, or damage from falling objects. These extra coverages protect both you and the lender, ensuring their investment is secure while you’re still paying off the loan.

Both collision and comprehensive coverage come with car insurance deductibles, which is the amount you'll pay your insurance company first in the event of a claim before they cover the rest. Your lender may require you to pick a certain amount for it.

Are there additional types of insurance that are recommended for a financed car?

Let’s talk about two important options: GAP insurance and loss of use coverage. In the following sections, we will cover both options and more:

GAP Insurance

If your financed car is totalled in an accident, your insurance company will typically cover its current market value. In a perfect world, that amount would match what you still owe on your loan, leaving you in the clear. Unfortunately, that’s not always the case—you might still owe thousands more than the car is worth. That’s where GAP (Guaranteed Asset Protection) insurance comes in.

GAP coverage covers the difference between what your car is worth and what you still owe on your loan if the car is declared a total loss. For example, if your car is totalled and your insurance payout doesn’t cover the full loan balance, GAP insurance steps in to cover that shortfall, so you’re not stuck paying out of pocket. While not all financing companies require GAP insurance, we strongly recommend you consider it, especially if you’re early in your loan and still owe a lot on the car.

Limited Waiver of Depreciation

Vehicles depreciate quickly, sometimes as soon as you drive them off the lot. A limited waiver of depreciation allows you to waive the depreciation in the event that your vehicle is a total loss within the first 24 months after purchase. Some companies may even extend this up to 48 months after purchase. This allows you to be put back in the same position that you were in immediately prior to the loss without having to worry about owing more money on your vehicle due to depreciation.

Loss of Use Coverage

While not essential, loss of use coverage can be incredibly helpful if you’re left without a car after an accident. It can also be helpful if your car is in the shop for repairs or totalled and needs replacing; this coverage helps pay for temporary transportation. It could cover things like public transit fares, taxi rides, or the cost of renting a car until you’re back on the road. It’s a great way to avoid scrambling for alternatives while your car situation gets sorted.

Now, what happens if you’re in an accident with a financed car and you do have insurance?

If you're in an accident with a car you’re financing, the steps are pretty similar to any other accident—stay at the scene and call for medical help if needed. Try to document the scene by jotting down details and snapping a few pictures of the damage—they’ll come in handy when filing an insurance claim.

If the damage looks severe, someone is hurt, a pedestrian is involved, or the other driver leaves the scene, call 911 to report it to the police. A police report can be a lifesaver in clarifying what happened, determining fault, and settling any disputes. Plus, your insurance company will likely ask for it to process your claim. If you’re involved in an accident with a financed car and you have insurance, here’s what you should do:

Contacting your insurance company

You'll need to contact your car insurance company to report the accident, even if it wasn’t your fault. It’s a requirement under your policy, and they’ll walk you through the claims process, including handling the other driver’s insurance if necessary.

Your insurance company will decide whether your car is a "total loss" or if it can be repaired. A total loss is when the repairs would cost more than replacing the vehicle itself. They'll determine this by figuring out your car's actual cash value (ACV), which is how much your car is worth on the day of the accident.

Contacting your lender

If the car is totalled, your lender will also need to know about the accident. They’ll work with your insurance company or the at-fault driver’s insurer to sort out the insurance settlement payout since the car is technically still their collateral until you’ve paid off the loan.

However, keep in mind that you’ll be responsible for following up on any remaining balance on the loan if the insurance payout doesn’t fully cover it. Remember, the insurance company will only pay out the actual cash value of the car. If that amount is less than your remaining balance, you'll have to pay your lender the rest. This is where having that optional GAP insurance that we talked about comes in handy.

What if I don't have GAP insurance?

One option—though not always ideal—is to reach out to your lender and see if they’ll let you roll the amount you still owe on your totalled car into a new car loan for your replacement vehicle. If they agree, this means higher car payments for you, but it may also be the best way to get back onto the road sooner.

Get the right protection today with BrokerLink

If you’re financing a car, comprehensive and collision coverage is often required—but even if it’s not, we highly recommend having both to protect yourself in case of an accident. We also strongly suggest adding GAP insurance to cover you in case of a total loss.

Need help finding the right coverage? Reach out to a BrokerLink advisor today. Whether you prefer to call us at 1-855-451-8748, send an email, or visit one of our locations across Canada, we’re here to help. You can also try our free online quote tool to get a competitive quote in just a few minutes. Whatever works best for you, we’re happy to help!

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FAQs for what happens if you wreck a financed car without insurance

Can I finance a vehicle without insurance?

No, most financing companies will insist that you maintain collision and comprehensive coverage insurance on your vehicle for the entire length of your loan.

Does a financed car need different insurance?

If you’re financing a car, you’ll need to have at least the minimum insurance coverage required by your province. However, your financing agreement might go a step further and require additional coverage. For instance, many lenders expect you to carry collision and comprehensive insurance, and some may even require GAP insurance to fully protect their investment.

Does car insurance cover repairs on a financed vehicle?

Yes, because most lenders require you to have both comprehensive and collision coverage. These coverages can help cover the cost of repairs or replacing your car if it’s damaged in an accident or by other events your policy covers, like fire, theft, or vandalism.

Can I drive a car without insurance if I just bought it in Ontario?

No. It is illegal to drive a car anywhere in Canada, including Ontario, without car insurance. If you just bought a car and are looking to drive it home, you must purchase car insurance or add the vehicle to your existing car insurance policy first.

If you have any questions, contact one of our local branches.