There’s no one right way to acquire a car, and different options come with different benefits. They also come with different insurance requirements, depending on whether you’ve leased or financed your vehicle.
You may have decided to roll up to that Subaru or Tesla dealership prepared to buy your dream ride outright, in cash. (Nice one, player!) More likely, you’ll put some money down and finance the rest—after all, new cars ain’t cheap.
Alternatively, you may have decided to lease your automobile. This is basically like renting the car, with the upside being that you can trade your wheels in for a newer model when your lease term is up, and the downside being that you never actually “own” the vehicle.
Here, we’ll be taking a close look at how your car insurance policy requirements will vary depending on whether you’ve financed or leased.
TL;DR: If you own your car—as in, you’ve paid for it in full—you only need to meet your state’s requirements. But if you’re leasing the vehicle, or if a bank or dealership also owns your car with you (aka, you’re financing it), they will probably require you to carry specific insurance coverages beyond the state minimums.
What it means to have a financed car
When you finance a new or used car, you make a down payment, and then make monthly payments on your car loan until the full value is paid off. Once that happens, you officially own the vehicle, and the title will be in your name. Sweeeeet.
If you’re the kind of person who wants to soup up their ride, financing or buying outright also has benefits. A leased car comes with restrictions and hoops to jump through if you want to modify it. Think of it this way: How open would your landlord be to you knocking down walls in your rental apartment and painting flames and dragons on the ceiling?
Auto insurance for your financed car
In many states, the law will only require you to maintain a minimal amount of car insurance. That might just be liability coverage, which only kicks in to cover bodily injury or property damage you cause to other people you are involved in an accident with—not damages or injuries to you or your car.
Now, when you’re financing a car, that means your lender “owns” the vehicle alongside you until you’ve finished making all your payments. Obviously, they have a vested interest in making sure your car remains in good shape—as in, it holds its value and doesn’t become a giant, two-ton paperweight following a crash. So they’ll likely want you to add additional insurance coverages that will help protect their investment.
In most cases, that means adding both comprehensive and collision coverage to your policy, and setting a deductible that’s not more than $1,000. (Having a high deductible means your insurance premium payments will be lower—but it means that you’ll have to pay more out-of-pocket in the event of an accident claim.)
Can you remind me of what those coverages entail?
If you’re looking to really school yourself, check out our helpful 101 guide to car insurance. In the meantime, we’ll give you a quick summary.
While liability coverage is designed to protect other people involved in an accident, collision coverage protects you and your vehicle. So if you blow a tire and crash into a stop sign, or if you rear-end someone in a parking lot, this coverage will help cover the resulting damages to your own car.
Comprehensive coverage, meanwhile, extends your protection to other perils, from Act of God-style accidents to vandalism—like a tree being knocked over and crushing your Jeep; an irate neighbor keying your hood; or your car itself being stolen by a joyrider.
Those are the coverages your lender will likely require you to carry if you’re financing your car, but there are plenty of additional coverages you can layer onto your policy for ultimate peace of mind.
Robust, full coverage means higher insurance rates and premiums, but you’ll be grateful in the future if you get in a crash or fender bender. Here’s a rundown of all your options, including things like Personal Injury Protection and Uninsured Motorist Coverage.
What it means to have a leased car
As we mentioned, “leasing” a used or new vehicle essentially means you’re renting it. You don’t own it, and you’ll probably never own it (unless it’s a lease-to-own scenario, naturally).
After your lease term is up—commonly, that’s around 36 months—you give the car back to the lessor. The title of the vehicle is never in your name.
Some benefits of leasing a car:
- Novelty. After your lease term is up, you’re able to trade up for a newer model, or lease an entirely different car.
- Cheaper. In general, your monthly payments will be lower than if you had financed a similar car.
- Penalties. It can be $$$ if you want to eject from your lease before the term is up.
- Mileage. If you drive often, a lease might not be right for you, since contracts may put a limit on how many miles you can drive annually without paying fees.
Consumer Reports has a concise compare-and-contrast guide if you’re still deciding between financing or leasing your car.
Auto insurance for your leased vehicle
Since you’re basically borrowing the vehicle for a period of time, and paying for that privilege, your insurance requirements will be a bit more stringent than if you’re financing a car.
In most cases, you’ll need to carry comprehensive insurance and collision insurance on your policy. (If you missed it, we explained those in the section above.) Generally you’ll have to choose a deductible of no more than $1,000.
Most leasing companies will also specify the minimum amounts you set for different coverages.
For Bodily Injury Liability for instance, the minimums will likely be 100/300 (TRANSLATION: $100,000 of coverage for every person involved in an accident, capped at $300,000 total for a single accident). For Physical Damage, the minimum will probably be $50,000.
Gap insurance, explained
You may have heard of “gap insurance” before. It’s an additional coverage that can come in handy in various circumstances. For instance, if you’re leasing a car, some lessors might require it. And if you buy a new car and make a down payment of less than 20%, it could be a good idea to have.
At the moment, Lemonade does not offer gap insurance. The good news is we’re always updating our coverage options, so it’s worth checking back in the future.
In brief, gap insurance would kick in only when your vehicle has been declared totaled.
Gap insurance covers the difference between what you owe your lender and your car’s actual cash value (ACV). If you owe $14,000 on your loan and your car’s ACV is only $10,000, this insurance covers the “gap” between what you owe and your car’s value. (In this hypothetical example that would be $4,000, minus your deductible.)
You can read more about gap insurance here.
How to get auto insurance for your leased or financed vehicle
Getting an insurance quote with Lemonade is fast and easy, and can be done from the comfort of your phone. It helps to know in advance what your lender or lessor might require in terms of car insurance coverage, so you can always ask them directly.
At the moment we’re only available in Illinois and Tennessee, but if you live elsewhere, you can sign up for the waitlist and we’ll let you know as soon as we roll into your town.