When you decide to get a new car, you’ve got to decide how you’re going to obtain it: Outright purchase with cash, purchase by financing or leasing. Most of us don’t have the liquidity required to purchase a new car with our own funding upfront. That leaves us to either finance the car to own it, or lease it for a predetermined period of time. Lease vs. buy isn’t just the initial financial consideration, either. The path you take in getting your new car also can have an effect on your insurance premiums, but not a huge one.
Let’s look over the similarities and differences between leasing and purchasing. First, both methods are a type of financing. One aimed at purchase of a car, the other aimed at usage of a car. You’re literally paying for the depreciation of the value of a leased car caused by your usage. Despite this minor difference, a lease is still a financing agreement between the leasing company and you, one that uses a contract that specifies the exact terms of the lease, just as a financing agreement does.
Expect both a leasing agreement or a financing agreement to share an identical feature: they’ll have a contractual demand that the car remain under insurance coverage for the entire time of the agreement. Lease or purchase, the lease or lien holder will always require this. Both will also have specified lengths of time. Whether purchase or lease, the time period will likely cover over 12 months, 24 months, 36 months or even 48 months.
A leasing contract even features financing-type items such as a built in interest rate, although that’s normally an invisible calculation built in by the company you’re leasing with. Leases may or may not require down payments. The advertised lease specials normally do include a down payment. Expect to pay a security deposit, taxes, tags and title fees at minimum, although those with higher credit ratings may have security deposits waived. Some leases will feature an “acquisition fee” as an added cost.
As an example, let’s consider the leasing/purchase agreements on a theoretical new car you’re going to lease or purchase that features an MSRP of $45,000, no money down but a $5,000 trade in credit, a $250 lease acquisition fee, a zero percent financing rate on purchase and .05% interest rate on the lease and a sales tax rate of 6%.
Leasing this vehicle is much cheaper over the 36-month term, with a monthly payment of only $435.64, which includes tax. That compares to a finance payment of $1,105.14. Your total investment or cost is also lower with the lease.
You can expect similar costs for car insurance policy premiums for the same automobile purchase or lease. However, leasing has one other insurance-related bonus. One of the best features of a lease from an insurance perspective is that leases include gap insurance as a built in feature. Because cars depreciate so fast and financing be arranged for terms of five years or longer, the purchase of a car can often leave the owner owing more than the car is worth. Gap insurance is not included as part of financing agreements, so it must be purchased from a third party or your auto policy issuer.
Leasing has a few advantages, especially if one changes cars often. From an insurance perspective, it does include gap coverage, but it doesn’t offer much more of an advantage than that. So while leasing can save you money, just don’t expect it to translate into huge insurance savings.
And one final word of warning regarding leasing and car insurance. Because one can lease a car much cheaper than buying, it isn’t uncommon for folks to get a much more expensive car that can lead to higher insurance rates. Make sure you inquire and obtain quotes before you sign on the dotted line.
