Leasing may appear attractive when you’re in the market for a new vehicle. The monthly payments are often less than with an auto loan, and you won’t have to worry about the car’s depreciating value. One cost you may not think of right away is insurance.
While insurance for a leased car is not inherently more expensive, it could cost you more. Leasing companies often require higher coverage than lenders, raising your rates.
If you’re interested in leasing a car, here’s what you need to know about insuring it.
The Difference Between Leasing and Buying a Car
When you lease a car, you rent it for a set term, usually three years. You must put money down and make monthly payments, typically lower than auto loan payments. The car remains under warranty, so you don’t have to worry about maintenance and upkeep. When the lease term is over, you can return the vehicle to the lender, renew the lease, or do a lease buyout.
Leasing can save you money on a brand-new car, but it has drawbacks. The leasing company may restrict your mileage and your monthly payments don’t bring you closer to owning the car. With a loan, you build equity. When you pay off the loan, you own the vehicle outright.
Can you lease a car with bad credit? While possible, leasing usually requires a stronger credit profile than buying. Expect to pay higher interest rates or provide a larger down payment. Getting a car loan with bad credit would be easier.
What Type of Insurance Do I Need for a Leased Car?
When you lease a car, your insurance must meet the dealer’s standards. Most lease contracts stipulate full coverage auto insurance to protect their asset, the vehicle. Full coverage includes:
Collision coverage: Pays for the repairs to your car if you are in an at-fault accident with another vehicle or object. The leasing company may require a low deductible, which drives up your insurance premium.
Comprehensive coverage: Protects against non-collision events like theft, vandalism, weather damage, or an animal encounter.
Liability coverage: Covers medical expenses or property repairs due to damage caused by your vehicle.
Gap insurance: Covers the difference between your car’s value and what you owe on your lease if the vehicle is totaled or stolen. This coverage is optional if you finance a car.
Most states mandate some liability coverage. Auto loan lenders typically don’t require more than that, but your leasing company may ask for a higher limit. This is because the leasing company technically owns the car. They do not want to be on the hook for your accident and wish to protect their investment.
Factors That Affect Car Insurance Rates
Various factors influence car insurance premiums. Many of which are specific to the individual driver. Knowing what factors insurers consider can help you find discounts.
1. Driving record: Drivers with accidents, speeding tickets, or DUI convictions are typically considered high-risk and charged more. On the other hand, drivers with good records may receive discounts.
2. Credit score: Insurers often use credit-based insurance scores to assess risk. Drivers with poor credit receive higher premiums since they are statistically more likely to file a claim. Not only can leasing be more expensive with poor credit, but your insurance might be, too.
3. Location: Where you live affects your rates. If you live in an area with high traffic, accidents, theft, and vandalism, expect to pay more.
4. Vehicle type: The make, model, age, and safety features of your car play a role. Luxury vehicles, sports cars, or models with expensive replacement parts will drive premiums higher. Additional safety features can lower your premium.
5. Mileage and usage: Insurance companies often charge drivers with high mileage more since they are more likely to be in an accident.
6. Age: Experienced drivers are less likely to get into accidents. You may be able to get a discount depending on your age.
How much is insurance on a leased car?
The average cost of insurance for leased cars varies from state to state. LendingTree found that Maine has the lowest average at $1,100, whereas Michigan has the highest by far at $4,638 per year.
Should I Lease or Buy a Car?
Whether you should lease or buy depends on your personal preference, financial situation, lifestyle, and long-term goals. Leasing is ideal if you want lower monthly payments, don’t drive a lot, and prefer driving a new car every few years. However, you don’t build equity, and insurance costs can be higher due to lease requirements.
The advantage of buying is that you gain full ownership of the vehicle once you’ve paid off the loan. It’s often cheaper in the long run. Choose this option if you plan to keep the car for many years and want fewer restrictions.
Final Thoughts
Insurance impacts the cost of your new car, whether you choose to lease or buy the vehicle. It’s true that insuring a leased car tends to be more expensive since leasing companies have stricter requirements. That said, you can still get discounts.
Look into all the factors that contribute to your insurance costs. You may be able to lower your rate by taking a safe driving class or building credit. Leasing is only one part of the picture.
