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Leasing Vs. Financing a Car: Does It Affect Insurance?

June 18, 2013

Buying a carLeasing and financing are the two methods by which most people purchase a new car. Both involve making monthly payments, and in both cases an outside company has a stake in the vehicle. This means that they have an interest in protecting that vehicle, and it does relate to how your car is insured.

Insurance Rates

There is no difference in how much it will cost to insure your car based on whether it is leased or financed. Insurance companies rate based on a variety of factors, but how you purchased your car is not one of them. A leased car, a financed car, and a fully owned car will have the same insurance rate, all other things being equal.

Insurance companies determine rates based on things like your driving record, how and where you drive, how long you have been driving, and the year, make, and model of your car. But while the type of car you drive does impact your rates, that car will have the same rate no matter how you purchase it. Be sure to compare car insurance quotes to ensure you’re getting the best rate available for that car.

Leasing and Financing: The Difference

Leasing and financing are both a way of getting the car you want on a monthly payment plan. The main difference is that with financing, you are taking out a loan in order to purchase the car, and making payments to the financial institution that provided you with the loan, along with interest. Eventually, unless you sell the car, you will have the loan paid off and own the car outright. Even while paying off the loan, any value of the in car belongs to you after the loan amount is paid off.

With a lease, you do not own the car and are not paying it off. You are paying a monthly fee to a leasing company for the privilege of driving the car. Most leases have the option to purchase the car when the lease term is up if you want to do so. A lease usually comes with certain terms that include the length of the lease and how many miles you can put on the car during the lease term.

How Financing and Leasing Connect To Insurance

When you finance or lease a car, there is someone else who holds an interest in that car, and who must be paid off if the car is totaled. For that reason, your leasing company or financial institution will require that you have them listed on your policy as the leaseholder on the vehicle. This ensures that their investment is protected.

In the event of an accident in which the car is declared a total loss, the insurance company will first pay out to the lienholder (the finance company) or to the leasing company. In the event that the car is worth more than you owe on it, you will receive the remainder of the benefit amount after the financial institution is paid off. There is, however, a situation in which the opposite might be true, and coverage for that situation is known as gap insurance.

Gap Insurance and Waiver of Depreciation

Cars depreciate over time, meaning that as they get older they lose their value. If you did not put a down payment down or get a really good deal on that car, especially if you bought new, you may find yourself upside down on it. This means that you owe more on the vehicle than it is actually worth.

If your car is a total loss and you discover you are upside down, you could find yourself in the position of having to pay off the remainder of the loan on the car on top of what the insurance company will pay. Insurance companies will pay only the actual value of the car – unless you have waiver of depreciation or gap insurance.

Waiver of depreciation is an optional coverage you can choose for a new car – usually up to two years old – that promises you the total value of the car new in case of a write off. That means you won’t lose any money.

Gap insurance is a special coverage that will pay for the difference between what you owe on the car and what the insurance company is willing to pay out. It can be purchased on any vehicle, of any age.

Leasing and financing have no impact on your car insurance rates, but you will have to make sure that both your interests and the interests of your finance or lease company are protected. Your insurance company can help you to be certain of this.

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