How does having a car loan impact your insurance?

 

The simple answer is how you decide to pay for a car will not affect how much you pay for coverage. However, the situation is more nuanced and there are some things you need to know when insuring a leased or financed vehicle instead of an owned vehicle. Firstly, it’s important to point out that auto insurance companies use several factors to determine the price of a new policy.

For example, insurers look at the location of the vehicle, type of the vehicle, and driving history. There are also some important things you need to consider. Perhaps most crucial, it is worth remembering your car is still "owned” by the finance or leasing company and they want to protect their investment.

Because of this, you must purchase collision and comprehensive insurance on a financed or leased vehicle. While most motorists choose this coverage type anyway, some don’t, and it could leave you vulnerable. Without collision and comprehensive coverage, you will be on the hook for any damage to your vehicle not caused by another driver.

It’s good to know insurance companies won’t be assessing your premium based on how you purchased your vehicle. Despite that, the best bet when looking for coverage is to shop for a car insurance quote to find the best deal that meet your needs.

Differences between leasing and financing

Before getting to the insurance specifics of leased and financed vehicles, it’s best to know the differences between leasing and financing.

Financing - When you finance a vehicle you are essentially taking out a loan to be able to buy the car. That means you will owe the money that paid for the vehicle to the financial institution that provided the loan. Once the term of the loan is paid, you will own the vehicle outright. During the loan period, you can sell the vehicle and any value recouped will be yours once the loan is repaid.

Leasing – If you decide to lease a car, you will not own it. Instead, you pay a monthly fee to the lease company to use the car. You could compare leasing to renting a car. That said, there are some important differences when leasing instead of renting. For example, a lease is usually over a longer term and you have the option to purchase the vehicle when the lease term ends.

Loan requirements

As mentioned, your insurance quote won’t change whether you lease or buy a car. Nonetheless, the lease or finance company could stipulate that you meet certain limits on your policy. Remember, a company that leases vehicles remains the title holder on those cars and will require full-coverage protection.

So, there’s really no point in trying to save some extra cash by avoiding full collision and comprehensive benefits. In fact, while your auto insurance won’t be affected in terms of assessment by your insurer, the lease company could also require you to hold a good level of third-party liability and maybe other endorsements.

Liability coverage for leased and financed vehicles

When you buy a car with your own finances, your insurance options are usually more varied than when you lease or finance. You can choose to only have the mandatory minimum coverage in your province. For financed or leased vehicles this option is not available, and you will need to hold additional protection.

Finance and lease companies will have strict requirements in place regarding how much liability coverage you should have. Indeed, it is usual for companies to demand at least $1 million of liability coverage from customers. If you’re in Ontario, this number exceeds the provincially mandated minimum of $200,000. The good news is leading auto insurance providers already offer liability coverage of $1 million as an entry-level. That means you won’t be paying more for your auto insurance liability if you lease of finance your car.

Is gap coverage used for financed or leased cars?

Gap insurance is an important part of the auto insurance equation when you’re leasing or financing a vehicle. In some provinces this is provided by an endorsement on your auto policy called "Waiver of Depreciation” coverage. There are some criteria that must be met for this coverage to be applied, for example, the vehicle must be a new vehicle, typically less than two to three years old.

If a collision occurs, the insurance company will payout to the financial lender or leasing company. When this happens, the car could be worth more or less than what you currently owe. With the depreciation in the auto market it is more likely that your car would be worth less than what you owe. In these situations, your insurer can cover the remaining balance with a benefit called gap coverage.

 Gap coverage offers another important benefit. Specifically, you could be on the hook to pay the remaining payments on your lease or finance agreement if your vehicle is lost in a collision. Gap insurance protects you by helping you pay the outstanding payments.

Remember, whether you opt to buy a new car or lease it, the best way to find insurance quotes is by shopping around for the best rates.

Coverage discounts for out-of-use situations

Many car owners don’t use their vehicles year-round and can often get auto insurance discounts for limited use. That’s not typically the case with financed cars because most lenders require full coverage all year round. So, you won’t be saving any money on auto insurance if you finance a convertible just to use during summer.

How leasing and financing impacts auto insurance?

Leasing or financing a vehicle will not necessarily change how much you pay for auto insurance. However, it depends on your current insurance coverage because lenders have specific requirements. Below are some important facts to remember:

·        Financing or leasing is not part of the criteria insurance companies use to determine the cost of your premium.

·        Your insurance can still be impacted because finance and lease companies will have specific coverage requirements.

·        Liability coverage above provincially mandated limits is required.

·        Gap insurance is worth considering because of its benefits to lease and finance deals.

·        To finance or lease a car, you will typically need full coverage throughout the year.