Buying a Car Versus Leasing It: How Does It Affect Your Insurance?

In today’s economy, most millennials rent apartments they wish to buy but can’t afford. The amount of assets needed upfront to rent are far less than what’s needed to buy, making renting more affordable as a short-term solution. However,  renting can be more expensive in the long term. Monthly payments are often lower when you purchase a home, and eventually, you won’t have payments after paying off your loan. 

This doesn’t just apply to housing. In the auto industry, leasing cars has become more popular due to the apparent advantages it has over owning a vehicle. But both buying and leasing actually have disadvantages that may not seem obvious right away. So how do these two options compare?

Why lease a car in the first place?

Leasing a car is an affordable option for those looking for a low monthly payment, as it is much lower compared to buying a car. It’s perfect if you don’t drive a lot for work since most leased cars don’t allow you to drive more than 36,000 miles in 3 years. Leases also include a warranty for general maintenance and minor scratches and dings. 

If you don’t want to worry about maintaining a vehicle for a long period of time, then this is a good option for you. It’s like getting a new car every few years and not having to worry about the car depreciating in value or figuring out how to sell it. Basically, you’re just borrowing someone’s nice, new car for a few years.

What are some of the problems with leasing?

Leasing does have its drawbacks. For example,  if you drive a lot for work, then you may have an issue with maintaining the mileage. If you go over your mileage, you get charged a penalty for every mile you go over. This can be as high as 25 cents a mile which doesn’t seem like much but can add up quickly.  Additionally, if your car gets damaged you have to pay for the fixes. If you turn your car in with too much damage, you will get bombarded with penalty fees. 

Another disadvantage is that it’s hard to get out of a lease agreement. There is a penalty fee if you cancel the agreement early. If you have bad credit, then you will need a co-applicant for the lease because it usually requires better credit scores than an auto loan. You also would not be able to modify or customize the car in any way. 

Finally, the biggest disadvantage of leasing a car is that it’s basically renting. In other words, when you reach the end of the lease term, you won’t own the vehicle and you won’t get back any of the money that you put into it. 

And the insurance?

Every car is required to have car insurance; leased cars are no different, but there are certain insurance requirements for them. For one, you typically need to get both comprehensive and collision coverage. Collision covers damage to your car that occurs when your car collides with something-- like another car. Comprehensive covers things hitting your car like animals or objects. It also provides protection if your car is destroyed in a fire, vandalized, or stolen. These are required by the leasing companies to make sure their car is taken care of because when you are leasing, it’s never really your car.

You may also have to get  GAP (guaranteed asset protection) insurance, which can help cover the difference between what your insurance will pay and the amount you owe on your auto loan. This is in case your car is stolen or declared a total loss and you owe more than the car is worth. This would protect you from owing on a car that you don’t even have anymore.

Buying a Car

Of course, owning a car also has its advantages and disadvantages. For one, whatever company you finance your car with will typically require the same amount of coverage in terms of car insurance. However, finance companies usually require lower liability limits. Once you pay your car off, meaning you own the car, you’ll be able to opt for less insurance coverage if you so choose. 

If you want to sell your car, you can as long as it’s paid off. You can refinance your car payments as well if they are too much for you. And although buying a car requires a large down payment,  you don’t have to have the best credit to get a loan. Some car dealerships don’t require credit or are fine with bad credit. Some also offer no money down at signing.

Moreover,  if you like to express yourself through your car, you can customize your car to however you see fit. You can add bumper stickers, lights, paints, sound systems, interiors, and tints among other things. If you’re someone who doesn’t mind if their car looks a little beat up, then you certainly don’t have to worry about fixing it after paying it off. You can also drive this car as long as it can go, so no worrying about going over a certain mileage. You have different options to buy like used or new and from a dealer or from a private owner.

Buying a car makes sense financially for some people and for some it doesn’t. For some leasing is the better option. Most people that lease don’t drive a lot and have good credit. Those who buy can afford higher monthly payments but enjoy the freedom of owning a car. When deciding on whether to buy or to lease, weigh all the pluses and minuses and apply them directly to your situation. It’ll certainly help you out later down the road.