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Insurance for Leased vs. Financed Cars

Updated: July 2019

If you're deciding whether to buy or lease your next car, it's important to understand what insurance coverages may be required in either situation. Some coverages may be required by law or by your lender, while other types of insurance may be optional for a financed or leased car.

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INSURING A LEASED CAR

Even though you don't "own" a leased car, you're still required to carry your own insurance on the vehicle, according to the Insurance Information Institute (III). Here are a few coverages to consider for a leased vehicle.

Car insurance coverages required by law

  • Liability coverage:
    Most states require drivers to carry a minimum amount of liability coverage. Liability coverage helps pay for someone else's expenses if you cause a car accident that injures them or damages their property.
  • Uninsured and underinsured motorist coverage:
    Depending on where you live, you may be legally required to have this coverage on your car insurance policy. If you're hit by a driver who doesn't have car insurance, uninsured motorist coverage may help pay for your medical bills. Underinsured motorist coverage works similarly if you're hit by an underinsured driver, whose liability coverage limits aren't high enough to pay for your medical bills that result from an accident they cause. In some states, you may be required to have personal injury protection instead of, or in addition to, uninsured and underinsured motorist coverage.

Insurance coverages required by your lease holder

The company that finances your leased car owns it. To help protect its financial interest in the car, the finance company will likely require you to carry collision coverage and comprehensive coverage as part of your auto policy, says the III.

  • Collision coverage:
    Helps pay to repair the car if you hit another vehicle or another object, regardless of fault.
  • Comprehensive coverage:
    Helps pay to repair the car if it's damaged by something other than a collision, like theft, vandalism or a falling object.

Insurance coverages may be included with your car lease

Many leasing companies automatically include gap coverage in your lease payments, says the III. Gap insurance helps pay off your auto loan if you're "under water" on the loan and the car you're leasing is totaled. Be sure to ask your leasing company if they include loan or lease gap coverage as part of your contract, the III says. If not, you may be able to purchase coverage from your insurer as part of your car insurance policy.

Insuring a Financed Car

When you buy a vehicle, you'll still be legally required to carry liability insurance. Depending on where you live, uninsured and underinsured motorist coverage and/or personal injury protection may also be required. Additional car insurance considerations depend on whether you get a loan for a car, buy a car outright and even the model year of the car you buy.

How car loans affect insurance

When you take out a loan for a vehicle, your lender may require comprehensive and collision coverage on your car insurance policy. You may be able to adjust these coverages on your car insurance policy once your car is paid off.

How buying a car outright affects insurance

If you purchase a vehicle without an auto loan (or pay off your auto loan), comprehensive and collision coverage are typically optional on your car insurance policy. A deciding factor may be whether you can easily afford to pay to repair or replace your car out of your own pocket if you get into an accident.

How buying a brand-new car affects insurance

If you're the original owner of a vehicle that's only a couple model years old, you may want to consider purchasing additional coverage specifically for a brand-new car. New car replacement coverage, for example, may help you buy a new vehicle of a similar make and model if your brand-new car is totaled.

WHAT'S THE DIFFERENCE BETWEEN LEASING AND FINANCING?

The main difference between leasing and financing is who owns the vehicle at the end of the lending period. When you lease a vehicle, you do not own the vehicle and must return it to the titleholder when your lease period expires, according to Consumer Reports. With a lease, Edmunds notes that you are essentially paying to "borrow" the vehicle during the lease period. You may have the option to purchase the vehicle at the end of your lease.

When you finance a vehicle, you own the vehicle at the end of your loan period (as long as you made all the required payments). Once you've paid off the vehicle, the lienholder's name will be removed from the vehicle title and it will be solely in your name.

IS IT BETTER TO BUY OR LEASE A CAR?

The benefits of buying versus leasing a car depend on several factors, including the amount of your down payment, the length of the financing agreement and depreciation. Use this calculator to compare the estimated costs of a car loan vs. a car lease:

WHAT ARE THE BENEFITS OF LEASING A CAR?

According to Edmunds, a few potential benefits of leasing a car are:

  • Driving a new car every few years, since lease periods typically last only two or three years
  • Lower maintenance costs, since most leased vehicles are still under warranty
  • Lower down payments and lower monthly payments

WHAT ARE THE BENEFITS OF FINANCING A CAR?

According to U.S. News & World Report, some benefits of financing a car include:

  • Ownership of the vehicle at the end of the loan period (assuming you made all required payments)
  • No restrictions on miles driven: Most leases restrict the amount of mileage leaseholders can put on a vehicle (for example, no more than 12,000 miles per year)

Trying to decide between leasing and buying a vehicle? For details on insuring your car of choice, talk to a local insurance agent

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This content is for informational purposes only and may not be applicable to all situations.

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