Do you want to know how leasing or financing a car affects your car insurance in Canada? Let's find out in this article.
Buying a car is one of the most significant purchases we make in our lives, with ample research, test drives, and financial planning going into the process. However, before you go ahead and buy a car, it’s recommended you weigh your options – do you lease, finance, or buy your car cash? And how will your car insurance be affected?
Before making a final decision, consider the differences between leasing and financing a car, as each option has its benefits and disadvantages.
Leasing and Financing a Car: What's the Difference?
If you’re in the market for a new car and don’t have the cash to buy one outright, your other options are leasing or financing a car.
Leasing a car entails renting a car over an extended period, making monthly payments until your lease ends. A lease usually lasts a couple of years, after which you return the car and look for other possibilities because you don’t actually own the vehicle. After the lease period expires, you may be able to purchase or finance the vehicle.
The alternative is a car loan comparable to a mortgage loan. Like leasing, you make monthly payments, but the car belongs to you once the loan is paid off.
Pros of Leasing a Car
- The car is always under warranty
- No down payments
- Lower upfront costs
- Easy to upgrade to a new car every few years
- Lower monthly payments
- You don’t have to sell the car after the lease expires
- Fewer repairs and maintenance costs as you’re driving a newer model car each time
- You can buy the car at the end of the lease
Cons of Leasing a Car
- Early termination costs
- You don’t own the car and can’t use it for a trade-in value
- No alterations or customizations allowed
- Less flexibility as kilometers are limited
- The car must be maintained to prevent paying additional fees
- Additional damage charges
- You will pay more due to interest on monthly payments
- Insurance costs are higher
Pros of Financing a Car
- You own the car
- Once the loan is paid, you have no monthly payments
- There are no restrictions on kilometres
- The car can get sold or traded in for equity
- You can drive the car for as long as you want
- Experts believe it’s the most cost-effective option
- You can customize or make alterations however you choose
- Insurance costs are lower
Cons of Financing a Car
- Higher monthly payments
- Higher upfront costs
- Higher interest rates due to longer loan terms
- When the warranty expires, you’re liable for repairs and maintenance
- The car’s value depreciates over time, reducing the value of your investment
- It’s your responsibility to sell it if you want or need to
How Leasing and Financing Affects Your Insurance
In terms of insurance, there is no difference between leasing and financing a car, so your car insurance premiums will not be affected. However, insurance companies base your rates on specific criteria, such as your gender, age, address, driving history, etc.
Even though your details are used to determine the insurance rate, the leasing or financing company will be named on the insurance policy.
Usually, if the car is involved in an accident, your insurance provider will first pay the amount owed to the financing or leasing company. If the car is worth more than the amount due, you will get the difference. Gap insurance will pay the costs if it is valued less than the outstanding balance.
No matter your choice, leasing or financing a car has benefits and disadvantages and doesn’t affect your car insurance. Ultimately, you will know what’s best for your current situation. If you’re uncertain which of the two options is best for you, consult your car dealer to get expert advice. It’s also vital that you read your contract’s terms before signing on the dotted line.
And don’t forget to compare car insurance with our tool to find the perfect car insurance according to your needs.