If you’re debating whether to lease or buy your next vehicle, there are pros and cons to each situation. You’ll also have to consider the insurance requirements. We’re here to help you decide which option is right for you and provide information on what to expect from an insurance standpoint.
What’s the Difference Between Leasing and Financing?
You may have heard of these two terms before but don’t know what they mean. Here’s the main difference between leasing and financing:
- Leasing — You rent the car for a period of time. Once your term is over, you either return the car or buy it.
- Financing — You purchase the car via an auto loan and monthly payments. You own the car once the loan is paid back.
Is It Better to Buy or Lease a Car?
The buying vs. leasing debate depends on various factors, including upfront costs, driving freedom, and vehicle depreciation. Let’s take a look at the pros and cons of buying and leasing a car.
The Pros and Cons of Leasing a Car
- + The down payment and monthly payments typically cost less than buying a car.
- + You can upgrade to the newest model every couple of years.
- + You could get a tax break if you use your leased car for business purposes.
- + Repairs usually cost less because the vehicle is under the factory warranty.
- – You don’t own the car, unless you decide to pay for it at the end of your lease.
- – If you always lease, you’ll make car payments for the rest of your life.
- – You have annual mileage limits — typically 15,000-20,000 miles. You’ll owe fees if you drive more than those limits.
- – Any damage to the car will result in fees.
The Pros and Cons of Buying a Car
- + You own the car once the loan is paid off.
- + You have flexibility in selling or trading in your car.
- + You can customize your car however you want.
- + There’s no penalty for driving excessively.
- – The car’s value depreciates as soon as you drive it off the lot.
- – There’s typically a higher down payment and monthly payment than in a lease.
- – You’re responsible for all maintenance costs after your warranty expires.
Insuring a Leased Car
Most states require you to carry auto insurance, regardless if you finance or lease your vehicle. Here are the main coverages to consider:
- Liability Protection — If you’re legally responsible for an accident, this coverage helps pay any medical expenses or repair costs.
- Uninsured/Underinsured Motorist Coverage — This coverage helps pay for damages to your vehicle caused by an uninsured driver or driver who doesn’t have adequate insurance.
- Personal Injury Protection (PIP) — PIP helps pay for medical, funeral, and other expenses no matter who’s at fault for the accident.
Insurance Coverages Required by Your Leaseholder
Whether it’s a dealership or specialized vehicle finance company, that entity owns the car you’re driving. Your leaseholder will likely require you to carry these coverages to protect its financial interest in the vehicle:
- Collision Protection — This coverage helps pay for repair costs due to a collision, regardless of fault.
- Comprehensive Coverage — This coverage financially protects you if your car gets damaged in an event other than a collision.
Insurance That May Be Included in Your Car Lease
According to the Insurance Information Institute, gap insurance is typically rolled into your lease payments. If you total or damage your car beyond repair, gap insurance can help pay the difference between your remaining lease balance and the check you receive from your insurance company. Be sure to check with your dealership or specialized vehicle finance company you purchased the vehicle from to see if gap insurance is included in your lease.
Insuring a Financed Car
Insuring a financed car is not too different than insuring a leased car. Most states require you to carry liability protection. Depending on where you live, you may also have to purchase uninsured/underinsured motorist coverage and personal injury protection (PIP). Other insurance requirements depend on how you buy your car.
How Do Car Loans Affect Insurance?
If you decide to finance your vehicle, your lender may require comprehensive coverage and collision protection on your car insurance policy. Once you pay off your loan, you can choose whether to keep these coverages or not.
What If I Buy My Car?
If you purchase your car without a loan, comprehensive coverage and collision protection are optional. However, it may be a good idea to get these coverages if you can’t afford to repair or replace your vehicle with your savings.
What If I Buy a Brand-New Car?
New cars generally cost more to insure because they have a high actual cash value (ACV). However, if your vehicle is equipped with the latest safety features and upgrades, you may qualify for discounts to help lower your premium.
Whether you lease or finance a car, you need to consider auto insurance. Mercury provides specialized coverage with best-in-class service at an affordable price. Contact us today for a fast, free quote!