Insurance for leased cars vs. bought cars

There are lots of factors that go into deciding whether to lease or buy a car: How often you plan on using it, what kind of car you want to drive, how long you want to have it, and what you can afford.

But whatever decision you make may also affect how much car insurance coverage you’ll need for your new ride.

Let’s break down some of the biggest differences between buying and leasing a car, and how each option will affect your car insurance choices (and your wallet).

• What’s the difference between buying and leasing?

• Insurance options for bought vs. leased cars

What’s the difference between buying and leasing?

Before we get into your car insurance needs, let’s take a look at the difference between buying and leasing.

Buying a car

Some people can afford to buy a car outright, and pay for the whole thing at once, but for many drivers, buying a car means taking out an auto loan. That means you’re borrowing money to purchase the car, and you’ll pay back that money over time, with interest. You can take an auto loan from a bank, your dealership, or another type of lender.

Buying a car can be cheaper in the long run than leasing, depending on how long you keep the car. When you lease a car, you keep paying monthly for as long as you drive it. But when you buy a car with a loan, you eventually pay-off the loan and the monthly payments stop.

And buying gives you the benefits of ownership: if you buy a car outright or finish paying off your auto loan, it’s totally yours. You’re also free to drive as much as you want, with no restrictions on mileage.

But with great power comes great responsibility — buying a car means that, once the warranty expires, maintenance costs are all on you. You also have to deal with the car’s depreciating value. It’s likely that, by the time you’re done driving it, your car will be worth a lot less than when you first got it.

Leasing a car

Leasing a car is sort of like a long-term rental. Instead of buying a car, you pay monthly payments for the use of one. You get to drive it, but you don’t own it. Monthly lease payments may be less than payments on an auto loan, since you don’t have to pay any interest.

Leasing means you’ll get to drive a new car every few years, because you can trade in your lease for a newer model without dealing with the hassle of unloading a car you own. You also don’t have to deal with your car depreciating in value, since you know you’ll be able to trade it in.

As we mentioned above, though, leasing a car can more expensive than buying in the long run, because the monthly payments continue for as long as you drive the car. And your lessor, or whoever owns the car you’re leasing, will place certain restrictions on your driving.

You’ll likely be limited to a certain number of miles per year‚ somewhere around 10,000 to 12,000 miles for most leases, after which you’ll be charged for any extra distance traveled. You also may face penalties if your car is damaged when you return it.

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Insurance options for bought vs. leased cars

Whether you’re driving a leased or bought car, you still need car insurance. Most states require you to have liability insurance at a minimum (that’s the coverage that protects you if you damage someone else’s property or cause injuries with your car). Even if you live in one of the states where auto insurance isn’t required, you need to be able to pay for the damages you cause with your car, so auto insurance is still important.

If you own your car outright, whether you paid for it up front or have paid off your loan, all you technically need to do is meet your state’s minimum coverage requirements, and then you can choose whatever other protection you want. But if you lease a car, or if you still owe money on a loan for your car, you may have additional insurance requirements.

What insurance is required?

If you lease your car or owe money on it through a loan, you’re likely required to include your lienholder or lessor on your auto insurance policy. And they may require you to get certain auto coverage that isn’t required by your state. That often includes comprehensive coverage and collision coverage, whether your car is leased or financed.

• Collision coverage pays for damages to your car caused by an accident, no matter who was at fault.

• Comprehensive coverage pays for damage that happens to your car when you’re not driving it, like damage from extreme weather, flooding, vandalism, theft or fire.

Your lessor or lender will require you to have comp and collision coverage because they want to protect the car. Unlike when you own a car outright, there are other parties with a stake in protecting the car from damage.

Another type of coverage to look into is gap coverage. This may be automatically included in your lease, but if it isn’t, and you lease a car or owe money on a loan, you should consider gap coverage. If your car is totaled, insurance will pay for you the actual cash value of the vehicle. But that might be less than the amount you’d owe to your lessor or lender, and gap insurance will cover the difference so you’re not stuck owing a ton of money.