If you’re considering buying a new car, you’ll have to decide whether you want to lease or finance the car. (Of course, it’s also an option to pay in full upfront, but most of us aren’t in a position to!) There’s a lot to consider when deciding between leasing and financing, including the cost of monthly payments, your driving habits (how many miles you expect to drive annually) and how long you anticipate you’ll have the car. But what about insurance costs?
Yes, the way in which you choose to pay for your new car could affect the insurance you pay every year.
The Difference Between a Leased and Financed Car
First things first, let’s identify the main difference between leasing and financing: ownership.
When you lease a car, you’re essentially renting the car for an extended period of time. Each month, you pay to continue renting it and, at the end of your lease period, you return the car to the dealer.
When you finance a car, you make monthly payments to a lender and, after your finance period ends and you’ve paid off the cost of the car and any interest incurred, you own the car free and clear.
Of course, since the terms of the agreements for leasing and financing are considerably different, the cost of each is also different. Leasing tends to be less expensive as your monthly payments essentially only cover the depreciation of the car. That way, when you return the car to the dealer, they haven’t lost any money. This explains why leases often have mileage restrictions; more wear and tear accelerates depreciation.
When financing a car, your monthly payments cover the cost of depreciation and your equity in the car so that after, say, 36 months, the car is yours.
Is it More Expensive to Insure a Leased or Financed Car
Whether you chose to finance your car or take out a lease, a third party has an interest in protecting the vehicle. When financing, that third party is whatever financial institution gave you the loan that you’re paying off each month. When leasing, that third party is the leasing agent or car dealer to whom you’re making a payment to every month.
While, yes, in both cases a third party has an interest in protecting the car, the leasing agent has more to lose if the car is damaged. As such, it’s required that leased cars have fully comprehensive coverage, which could cost more than the third-party insurance that all drivers in the UK are legally required to have.
It’s also important to realise that, when providing details about your vehicle to the insurance company, the registered owner isn’t you, but your finance company.
So, does all of this mean that leased cars are more expensive to insure than financed cars? Not necessarily! There are a handful of factors that can affect your insurance quote including the driver’s age, driving record, convictions, the make, model and year of the vehicle, the value of the vehicle and even where you park your car.
Top Tips for Reducing Insurance Costs
If you’re looking to reduce your insurance costs, switching from a leased car to a financed car shouldn’t be your first step.
Instead, look for a car with a smaller engine that’s worth less money, keep your car garaged, consider having a black box fitted and agree to a mileage cap.