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What are the effects of financing a vehicle on auto insurance?

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Here's what you need to know...
  • If you want to purchase a new car without paying the full price, you could opt to finance your new vehicle
  • Leasing a vehicle is the most common way to finance a new car purchase
  • Leasing a new car can help you save money because you have a smaller monthly payment
Most people cannot afford to pay for a new car in full. A convenient way to purchase a car without having to pay the full price up front is financing.

There are two main types of financing a car purchase:

  • Taking a loan
  • Leasing the vehicle

Leasing is the most popular form of car financing; one out of every five cars on the road today is leased.

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What is car leasing?

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The difference between a purchase loan and leasing is that a purchase loan finances the ownership of a car, while leasing is the financing of the use of a car.

A person leasing a car is not leasing the right to ownership, but rather the right to drive the car.

A lease usually has a predetermined length of time and mileage limits.

A lease is a contract between the driver and the leasing provider that allows the driver to pay for the value of the car that the driver uses during the time of their lease.

The driver pays for licenses, insurance, repairs, taxes, and maintenance, while the leasing provider keeps the title and ownership of the car during the leasing period.

When the leasing period ends, the driver can choose to return the car or buy it outright. Many people choose to return the car and lease another, newer one.

Why do people choose to lease a car?

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There are many advantages to leasing a car. For most people, saving enough money to buy a new car with one full payment is difficult.

Most people prefer a smaller monthly payment because it fits better within the constraints of their budget.

Some of the most popular benefits of leasing a car are:

  • Lower monthly payments
  • The ability to have a larger, more expensive car
  • A smaller sales tax

In addition, the down payment required is typically minimal or nothing at all.

With leasing, a person can often lease a new car for the same amount they would pay for a used car.

Who is the leasing provider?

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Most people think that it the car dealership itself that leases the cars, but usually banks and credit unions actually lease cars.

Some of the larger car manufacturers lease cars through their financial division. Car dealerships act as a middleman between the lease provider and the person leasing the car.

Most dealerships work with more than one leasing provider at a time.

When the driver chooses the car they want to lease, the dealership sells the car to the leasing provider who, in turn, leases the car to the driver.

Some people choose to contact their own independent leasing provider after they have negotiated with the dealership on their own over the price of the car.

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Who is the best candidate for leasing?

For some people, leasing is the best fit. A person interested in leasing a car must be able to commit to the time period of the lease.

A lease can run anywhere from two to five years, in 12-month increments. For some, this is a long commitment, so the driver needs to make sure that they are choosing a car that will fit their needs for the long run.

If a person wants to end a lease early it can be difficult and expensive.

A person interested in a lease should also be aware of what distance they drive annually.

A lease usually comes with a relatively low annual mileage limit that ranges from 10,000 to 15,000 miles a year.

People in larger cities or those who drive more than the usual are not always the best candidates for a lease. When someone goes over the mileage limit of a lease, they usually have to pay a fee for every extra mile.

How does leasing affect car insurance?

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Often a person who is leasing a car needs to purchase something known as gap insurance.

If the driver were to total the car in an accident or if the car is stolen, the basic insurance coverage on the car might not always cover the amount that would be needed to pay off the lease.

Gap insurance pays the difference between what the basic insurance covers and the amount that’s left on the lease.

Insurance for a leased car can be more expensive than on a fully owned car.

Most insurance companies also offer a feature known as excessive mileage insurance as a way to protect the driver if they exceed the mileage limit on their lease.

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