Leasing or Financing a Car: How Does It Affect Insurance?

Whether you decide to buy a car and finance the purchase or lease it from a dealership, you will need auto insurance. Whichever way you go, it doesn’t impact the cost of your policy. What will affect your rate are things like your driving and insurance history, where you reside, and type of vehicle you are insuring.

However, if you lease a vehicle, the leasing company will be listed on your policy since it technically owns the car. As you are required to protect their interest, you will likely have to purchase collision and comprehensive insurance for the vehicle. Most people have these coverages on a new car anyway, and it’s a smart move because without it, you're on the hook for any damage to it that occurs due to a collision or if it is vandalized or stolen.

The Difference Between Leasing and Financing a Vehicle

Leasing and financing are both ways of getting the car you want on a monthly payment plan. The main difference is that with financing, you are taking out a loan 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, the value of the 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. In essence, you are renting the vehicle by paying a monthly fee to a leasing company for the privilege of driving it. Most leases have the option to purchase the car when the lease term is up if you want to do so. A leasing agreement usually includes an annual kilometre restriction, early termination fees, and you may be required to pay for excess wear-and-tear when the lease expires.

If you’re mulling over whether to buy or lease a car, you need to determine which suits your financial picture best. On that note, the federal government provides an online lease or buy calculator that can help you figure out which way to go.

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If You Lease a Vehicle, You Will Need Collision and Comprehensive Coverage

While your car insurance quote won't differ based on whether you are leasing or buying, the leasing company may require you to include collision and comprehensive coverage. These coverages are optional, but if you lease a vehicle, the company you lease from remains the titleholder, and it will want the vehicle to be completely protected.

How Financing and Leasing Affect Car Insurance

When you finance or lease a car, the dealership holding interest in that vehicle must be paid off if the car is totalled. For that reason, your leasing company or financial lender will require that you have them listed on your policy. That ensures their investment is protected.

Third-Party Liability Coverage

Some leasing and finance companies require a minimum third-party liability coverage of $1 million. That is more than the provincially mandated minimum of $200,000 in Ontario and Alberta. However, most insurance companies offer and recommend $1 million in liability coverage as a default option, so you will not usually have to pay more for your coverage.

Gap Insurance: Extending Your Protection

Another optional type of coverage that can protect you when leasing or financing a vehicle is gap insurance. Many dealerships will offer this kind of coverage to a lessee.

In the event of an accident in which the car is declared a total loss, the insurance company will first pay the lienholder (the finance company) or to the leasing company. If 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.

Often, due to depreciation and other factors, you will find that the market value for your car is lower than the remaining balance on your loan or lease agreement. Coverage for that situation is known as gap insurance. It covers the gap between the value of the car and what you owe the dealership.

As soon as you drive off the lot, the actual value of the car begins to depreciate. If you are in an accident that totals the car, insurance will only cover the current value of it. But you are still liable to the leasing company for the full value of your lease agreement, which can be thousands of dollars more than the insurance company is required to pay out.

Depending on the lease agreement, you could still be on the hook for all of your outstanding future payments. That's where gap coverage comes in, providing payment to the leasing company for any outstanding balance you owe after insurance has been paid.

Many dealerships may require you to carry gap insurance when you lease a vehicle, and even if not, it is highly recommended. While it can add to your overall insurance costs, gap insurance can save you from dealing with a major financial headache.

Gap Coverage for Financing a Vehicle

You may also be required or advised to carry gap insurance when financing a new vehicle. Instead of owing the leasing company, you could owe your lender a considerable sum if the car is totalled in an accident. If you own the vehicle outright or are nearly finished paying off your vehicle, then you don't need gap insurance.

A possible alternative to gap insurance is a waiver of depreciation. It is an optional policy add-on you can get from your auto insurance provider, whereby the insurer will ignore the vehicle’s depreciation and pay up to the original value of it in the event of a total loss. The waiver of depreciation remains in effect for a set amount of time, usually for up to two or three years.