How does insurance work when leasing a car vs. financing?
October 6, 2022
Shopping for a new ride can be an exciting time—and with the perfect car in mind, you want it to feel like love at first sight. With so many aspects of a vehicle running through your mind (car color, interior features, car efficiency, etc), one thing you may also be thinking about ishow you will purchase your new ride.
Whether you’re paying for a vehicle with cash, leasing or financing through your bank—it’s important to understand how those choices will impact your wallet, beyond the car purchase price. For example, how it may influence your car insurance rate.
With folks purchasing, leasing and financing cars every day, we want to clear up how each purchase option can affect your car insurance policy.
Financed, leased or owned: vehicle ownership trends
There are millions of cars on the road—some are owned, some are leased and others are financed. Where does your car fall under? If you own your vehicle (paid for with cash or gifted), you’re in good company. Data collected from The Zebra, found that Gen Z are opting to pay for their vehicles in cash. They are also the least likely to finance a car.
So which group is mostly financing or leasing cars? According to the same research, Millennials are more likely to lease a vehicle compared to older generations. We discovered in a Forbes article that Millennials and younger generations may be more predisposed to lease new vehicles. Leasing offers consumers a pattern of “pay-as-you-go,” similar to how younger folks rent cell phones or clothes. It’s a short-term commitment.
For auto dealerships and consumers alike, leasing has its perks. After a lease, a consumer has the opportunity to purchase the car or turn it in and get a new vehicle every three years. This may be more favorable than a traditional financing option for younger generations.
Plus, lease customers are generally more likely to stay loyal to the same car brand. When a customer leases a vehicle at a dealership, they have to return to the same dealership. This allows the dealer to pitch the customer another car to replace the one that they’re returning.
Financing is also another popular car purchase option for Millennials and other consumers. The data from The Zebra research also found that one out of two respondents purchased their car through a financing option.
Financing can offer flexible payment options for those purchasing a new or used car—when paying for cash isn’t possible. If a car purchase is on your wishlist, let’s cover one of the lesser known, somewhat tedious aspects of owning a car: your car insurance policy.
Car insurance for leased cars, owned and financed
Because car ownership can vary, we want to help address what your car insurance may look like in each situation of a leased, owned or financed vehicle. We met with our insurance team to help address any differences in insurance to help as you consider a car purchase.
Financing a vehicle is usually done through a bank or car dealership. Because there is a vested interest in the vehicle’s condition, insurance requirements may look different compared to a vehicle paid in cash.
You can expect that your policy for a financed vehicle will need to have full car insurance coverage. This includes:
And, depending on your state, you may also be required to have additional coverages such as Uninsured/Underinsured Motorist or Personal Injury Protection. One coverage to think about when financing a vehicle is gap insurance. This is generally offered by the entity financing the vehicle, and may be a coverage offered by some auto insurers.
Gap insurance can help cover the gap between what is owed on your car loan and the depreciation of the vehicle, should you get into a total loss accident. Here’s an example to put things into perspective. After an accident that totaled your financed vehicle, your car insurance has determined they’ll pay $20K for your vehicle. Unfortunately, you still owe $30K on your car loan. Gap insurance, if selected, may help cover that remaining loan balance of $10K.
Insurance for a leased vehicle may look slightly different than traditional financing. When you’re working directly with a car dealer, they may have certain insurance requirements in order to lease one of their vehicles.
Because insurance requirements vary from state to state, the amount of car insurance you’ll be required to have depends on where you’re registering the vehicle. However, the company leasing your car may also have insurance requirements that must be added to your policy before driving away with it.
As with a financed vehicle, the leasing company may likely require you to add Collision and Comprehensive coverages to your policy. The coverage limits may also be set by the leasing company, often requiring you to have higher limits to cover specific deductible amounts or the vehicle in the event of an accident.
It can be a gratifying experience to purchase a car with cash. How does it affect your car insurance policy? Well, for starters, you must have a car insurance policy in place at the time of purchase, or soon thereafter—driving without insurance isn’t something we’d recommend.
When you have your vehicle paid off completely, you may only be required to meet the state’s minimum insurance requirements. As an insurance company, we strongly recommend that before opting for the minimum car insurance coverage, to consider your situation. Is your vehicle new and expensive? Do you live in an area where car accidents are common? Are there extreme weather phenomenons that could potentially damage your vehicle?
Most states only require Liability coverage on your insurance policy, which is there to help pay for injury or damage to the property of others, if you are found legally responsible. It doesn’t cover damage to your vehicle, protection from uninsured or underinsured drivers or roadside assistance.
Make sure you’re taking the “big picture” into consideration when opting for certain car insurance coverages. There’s no one-size-fits-all when it comes to insurance coverage. What do we recommend? Ask your car insurer questions! Insurance is tricky and filled with complexities that can feel overwhelming. At HiRoad, we’re happy to help clarify and explain things so you can make an informed decision about your policy.
Car insurance with you and your car in mind
Leased, owned or financed cars—it’s all one big happy family on the road. With vehicle purchase trends changing, it’s important to always consider how your car insurance policy and coverages may also change.
Even when the added cost of added coverage seems overwhelming (and a bigger investment), HiRoad may be a solution you didn’t know you wanted. Because we are a behavior-based car insurance company, which utilizes the power of telematics to recognize your good driving behaviors. Those good moments from behind the wheel are not only recognized, but they’re rewarded.
We want to celebrate moments of good with you—whether that’s driving at a safe speed or being less distracted behind the wheel—and reward you for them. Every month you can earn a discount on your insurance bill, helping you save a little extra to spend or save.
Neither HiRoad nor its agents provide tax or legal advice.
The information in this article was obtained from various sources not associated with HiRoad®. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. HiRoad is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. HiRoad makes no guarantees of results from use of this information.
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