Auto insurance is compulsory from just about everybody who owns a vehicle. Roughly 1 out of 3 American drivers choose to lease their cars. Most of the remaining motorists use loans to pay for vehicles. When you make this decision, it’s wise to consider the insurance implications. You may need to sign up for different types and/or amounts of coverage depending on whether you borrow or lease. Here are some of the most important factors to consider when it comes to insurance on your leased or financed vehicle:
Both leasing companies and lenders expect customers to buy auto policies. They normally require motorists to acquire liability, collision, as well as comprehensive coverage. These lienholders may also cap your deductible at $500 – $1,000. If you don’t carry the right insurance, your vehicle may even face repossession.
Regardless of whether you lease a car or take out a loan to finance one, insurers will charge the same rates on equivalent policies. The difference is that banks and leasing companies tend to require different coverage limits.
Leasing firms usually expect drivers to obtain better liability insurance than banks or state governments demand. Leasing firms often require customers to buy policies with property damage limits of $50,000 or higher, and medical coverage caps of at least $100,000. These amounts are several times higher than state law requirements.
You may wonder why leasing companies have such strong concerns about liability… The problem is that these businesses can face legal action if a customer causes an accident and doesn’t have sufficient insurance. A victim could file a lawsuit against the person leasing the vehicle and ask it to pay hospital and car repair bills.
Some lessees find that they have much higher insurance bills because leasing gives them the ability to travel in newer or more expensive vehicles. It’s not uncommon for people to pay lease termination fees after realizing how much more it costs to insure a recent luxury or sports car.
If a crash damages your vehicle beyond repair, most collision policies pay the auto’s used resale value. They only supply larger amounts when drivers spend extra money on full replacement insurance. If a financed car’s worth exceeds the loan balance, the insurer will pay you the remaining money. On the other hand, leasing companies often retain any excess funds.
It’s not unusual for people to owe more than their cars are worth. If the vehicle is totaled in an accident, the motorist may still need to pay more cash to a lender or person leasing the vehicle. The good news is that gap coverage can protect you in this situation. It will pay off the remaining loan or lease balance.
Insurers and lessors sometimes refer to gap insurance under other names, such as “waiver of depreciation” coverage. Either way, it greatly improves your ability to afford another vehicle after a serious accident. Be sure to consider purchasing it whenever you buy a new auto, make a small down payment, or purchase a car with a low resale value.
Leasing firms frequently provide gap insurance. They’ll add the premiums to your monthly payments. However, it’s not always included; remember to ask about this coverage when you lease a vehicle. On the other hand, auto loans normally don’t come with gap insurance. You’ll need to buy it separately if you want this type of protection.
As long as you lease cars, you must keep paying for full auto coverage. Financing gives you the option to drop collision and comprehensive policies after you’ve paid off the loan. You can just buy liability coverage to follow the law. However, you may benefit from retaining full insurance if you always own late-model cars.
The bottom line is that you’ll probably need to buy more coverage when you lease an auto. Nonetheless, you won’t pay higher premiums than you would if you bought an equivalent policy for a financed car. Gap insurance protects both borrowers and lessees when accidents “total” their vehicles. It’s more likely to be optional for owners.