How Does Leasing Affect Auto Insurance Rates
Insurance for a passenger vehicle varies in cost because of the obvious factors of driving history, vehicle make/model, and place of residence. However, the cost of car insurance depends heavily on the vehicle’s ownership. Many car shoppers head to the dealership intent on purchasing a new car but end up leasing a vehicle instead.
These customers are attracted to the special lease deals that require only a modest down payment and monthly installments that are usually 15-20 percent less than what would be paid if the car was bought and financed. Unfortunately, these shoppers may be new to the leasing game and are unaware that insuring the car will cost more than they expected.
Depreciation In Automobiles
Every car is worth about 10 percent less than its sticker price the instant it is driven off the dealer’s lot. This is understandable because of profit margins and statistics showing that a certain number of new cars are given a rough treatment by their owners.
However, a new car that is purchased with a finance package is a one-time deal for the lender. Although the car may be sold to a new owner after several years, the lender will no longer be a part of the picture once the loan balance hits zero.
This is accomplished either by having the loan paid down over the full term, paid off in advance with a lump sum, or paid off when the car is sold for cash. The lender has no further interest in the vehicle and is quite satisfied with the interest earned on the loan.
Such is not the case with a fleet of cars sold to a dealer for the purpose of leasing. These vehicles are sold to a dealership under a rather complex agreement with a bank. The bank will insist that the investment be protected because the vehicles can be sold in used condition once the lease agreement expires.
It is assumed that the car will suffer normal depreciation during the one or two years it is being driven by the lessee. Insurance rates are therefore calculated to accommodate any possible damage the vehicle suffers while it is under lease.
How Leasing Affects Insurance Rates
It is easy to become excited about the prospect of driving away a brand new sedan valued at more than $25,000 for a down payment of less than five percent and a monthly lease payment of under $250. However, the insurance company will charge more to protect the car because the bank’s agreement with the participating dealer will specifically outline minimum amounts of liability and collision protection that far exceeds what is usually required.
For example, a state may have a 25/50/25 liability law, and when a consumer purchases a new car with a finance package, the lender will require collision and comprehensive insurance for as long as the loan is active and payable. If the vehicle is leased instead of purchased, the bank offering the lease program may require as much as 100/250/100 in liability protection and an amount of collision coverage that equals the initial value of the car. This collision coverage amount will not decrease for the entire life of the lease agreement.
The result is a substantially higher amount paid each month by the lessee for auto insurance, not because the insurance company sees the vehicle or the driver as high-risk, but because the bank offering the lease demands it. Unlike a traditional auto loan company, the bank has a continuing vested interest in the car, long after the lessee returns it to the dealership.