Leasing a new car? Typical lease requirements require at least $300,000 in accident coverage which is supplied by most major auto insurers. Leasing is ideal for people who want to replace a car model every few years and don’t want to drive outdated cars. If you enjoy cars that have the latest technological bells and whistles, leasing is an excellent option to upgrade your car. You won’t actually own the car but the benefits are immense. Drivers who lease don’t have to worry about maintenance costs and the payments are lower than those of car mortgages. Leasing has serious requirements that might not be suitable for all people. The main consideration is the auto insurance requirements you’ll have to purchase when you’re leasing. Auto insurers have separate insurance plans for people leasing cars than those of people who own cars. This guide will distill the benefits/negatives of leasing, the lease car insurance requirements and picking the right coverage from your auto insurer.
Leasing 101: The Basics
Leasing is, for the most part, for new car models – it is a contract the lessee signs with the dealership that allows them to pay a certain amount of the car cost and return the car once the contract expires. Drivers have the option to purchase the car at the end of their lease term or upgrade it to a new model. When you buy a car without leasing, you pay for the full cost in advance and then the car is yours. Many people get a mortgage to buy cars and then pay monthly payments to the bank – this is not leasing. In the conventional way of purchasing cars, you own the car once you’ve paid off the car loan.
Pro Tip: Leasing is more similar to renting. You essentially borrow the car from the dealership and you pay for the depreciation value between the time you borrowed it and the time you bring it back to the dealership. You make payments the same way you would to a bank if you took out a bank loan, but you still don’t own the car. Once the lease expires, the dealership allows you to return the car or purchase it. The contract will include arranged miles which are the miles you’re allowed to drive the car (or you’ll have to pay more). If the car is damaged upon return, this can also increase the final price you pay.
Pros And Cons Of Leasing
Advantages of Leasing
- Save money. The monthly payments on a lease will be a lot lower than if you purchased a car with a bank loan. The difference can be significant.
- Brand new car. You can drive a car off the dealership in spanking new condition. The lease will also give you leeway to get a car that you couldn’t afford to purchase the conventional way.
- Warranty for lease duration. The lease gives the car a warranty for the entire duration of the contract you sign.
- Option to purchase the car. The contract doesn’t mean you must return the car once the lease expires. If you like the car and wish to purchase it after the lease is up, you can purchase it at the depreciated price.
Disadvantages Of Leasing
- The dealership owns it. The car is not officially your property unless you choose to purchase it at the end of the lease term.
- Depreciation. Cars depreciate by 20% in the first year they’re driven off the dealership lot. In 5 years, cars depreciate on average by 50-60%. You must replace the lease with a new one if you don’t want to pay high leases on outdated cars.
- Fines for early returns. The dealership makes money off long-term monthly payments. If you change your mind and want to return the car, you’ll have to pay a fine.
Lease Car Insurance Requirements
If you lease a car or buy a car outright you’ll always have to purchase liability insurance – basic liability insurance is mandated on a state level. The law dictates that each auto insurance plan has to include liability insurance with minimum requirements for protection if you hurt someone or damage property or vehicles while driving. For leases, the requirements are higher than on regular car sales.
- Minimum lease insurance coverage: $300,000 per accident, $100,000 on bodily injury (medical payments) + $50,000 car damage/repairs.
- Motorist coverage (for uninsured or underinsured damage). Leases require this in case you get in an accident with someone who lacks auto insurance or is under-insured to provide coverage for your repair. If they’re at fault they’ll have to pay for that, and if they’re under-insured your insurer will have to pay the repairs. This is why additional motorist coverage is required by most leasing companies.
- PIP (Personal Injury Protection). PIP protection is the last requirement that prepares you for a worst-case-scenario. This covers things that follow an accident: Medical expenses, financial coverage for lost wages, and/or funeral costs if someone passes in the accident.
Collision Vs Comprehensive Lease Insurance
There are two types of car insurance: collision and comprehensive. Collision protects you if the accident happened on the road – once the car hits another car. Comprehensive insurance is more extensive and protects the car for all damages. Comprehensive insurance protects a car from accidents off-road (hail storms, tree fall damage, etc) and vandalism/theft. If you buy a full coverage auto insurance plan, you will get both collision and comprehensive coverage. For your lease, you can get deductibles (lower rates) based on the type of insurance you have. If you have only collision insurance you’ll get lower deductibles. If you purchase more expensive full-coverage insurance you’ll get higher deductibles.
Gap insurance accounts for the decrease in value from the point you lease the car to the point you return it. A new car will depreciate by 20% in the first year and up to 60% in the first 5 years. The gap between those years can be a problem for auto insurers because damages are estimated based on the current value of the car and not the previous gap. Gap insurance is an optional upgrade that will protect your car from depreciation, but it commands higher premiums. Additionally, because you don’t own the vehicle you’ll have to name the lessee as the owner of the vehicle and name them the loss payee. If the car is stolen the dealership owners will be paid directly by the insurance company.
Note: If you take out a car loan to purchase a new car the lenders might have similar requirements to the dealership that leases a car. Most standard auto insurers should be able to provide coverage that meets those basic requirements.