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

By InsuranceHotline.com Team
Couple signs leasing agreement at car dealership

Whether you decide to finance the purchase of a vehicle or to lease, one thing is certain: you will need to get auto insurance.

Auto insurance companies take a number of various factors into consideration when underwriting a new policy, including your driving history, location of the vehicle and type of vehicle to be insured. One thing that doesn't go into pricing your policy is whether or not you intend to own the vehicle, or are simply leasing the vehicle for a certain amount of time.

If you are wondering whether leasing or owning a car affects rates, the simple answer is no. But there are a couple of nuances to be aware of when it comes to insuring a leased vehicle versus insuring an owned vehicle. Because your finance or leasing company technically "owns" the car you will need to protect their interest. That means you have to purchase collision and comprehensive insurance on a leased or financed car. Most people have this coverage on their car anyway, because otherwise you're on the hook for any damage not caused by another driver.

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.

Leasing Company Requirements

While your insurance quote won't differ based on whether you are leasing or buying, the leasing company may require you to reach certain limits with your coverage. When you lease a vehicle, the company you lease from remains the title holder and will want the vehicle to be completely protected.

So, if you were planning to save money by skimping on comprehensive and collision coverage, think again. When you lease a car the dealer will likely require you to obtain substantial third-party liability coverage and additional endorsements on your policy.

Find the Best Car Insurance Rates

Compare car insurance quotes from 30+ providers in a single search. Start saving money today on the premiums you pay.

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.

Liability Coverage

Some leasing and finance companies require a minimum of $1 million. This is more than the provincially mandated minimum in Ontario, where the figure is $200,000. However, most insurance companies already offer $1 million in liability coverage as their default option, so you will not usually have to pay more for your coverage.

Gap Coverage For Leased Vehicles

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.

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.

Why is it called gap coverage? That's because it literally covers the gap between the value of the car and what you still owe the dealership.

As soon as you drive off the lot the actual value of the car begins to depreciate. In the event that you are in an accident that totals the car, insurance will only cover the current value of the car. 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 will 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 totaled in an accident. If you own the vehicle outright or are nearly finished paying off your vehicle, then you don't need gap insurance.

Another alternative to gap insurance is a waiver of depreciation. This policy endorsement means the insurance company will ignore depreciation and pay up to the original value of the vehicle in the event of a total loss. This endorsement will remain in effect for a set amount of time, usually two years.

Whether you choose to lease a vehicle or obtain a loan to buy one instead, you can find the best car insurance rates on an auto policy by using InsuranceHotline.com.