Insurance for leased versus owned car: What you need to know

About one in five motorists lease rather than own their car, according to data from Cox Automotive.

Leasing can mean less money down and lower monthly payments than with a financed vehicle — not to mention spending less on repairs because they're covered by a bumper-to-bumper warranty.

Insurance premiums for a leased car may be higher, however, because of thedealership's coverage requirements.

If you're considering leasing a car, here's what you need to know about insuring it.

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While leasing and financing a car both involve putting money down and making monthly payments, lease payments are usually lower than car loan payments. That's because a lease is for a set term, most commonly for three years. When the term ends, the vehicle is returned to the dealer.

In the fourth quarter of 2023, the average lease payment was $606, according to Experian, while the average car loan installment was $738.

When your lease term is over, you can walk away, renew the lease or pay for the residual value of the car (with a lease buyout loan, if you need).

When you buy a car, you can either pay cash in full or take out a car loan. If you choose to finance your vehicle, you'll put a portion down and make monthly payments plus interest to cover the rest.

When your payments are done, you'll own the car free and clear.

Most lease contracts require the lessee to take out full coverage auto insurance, which bundles:

• Collision coverage: This pays for damages to your car caused by colliding with another vehicle or object, like a mailbox or guardrail.
• Comprehensive coverage: This pays for damage not caused by a collision — like theft, vandalism or an animal encounter.
• Liability coverage: This pays for medical expenses and property repairs due to damage caused by your vehicle. Most states mandate some type of liability coverage, though leasing companies may require higher limits.

You may also need a separate gap insurance policy, otherwise known as guaranteed asset protection coverage.

Since most cars lose 20% of their value in the first year, according to Kelley Blue Book, you could quickly find yourself owing more on your loan or lease than you'd get from a standard policy if the vehicle is stolen or totaled.

Gap insurance can make up that difference.

You may be able to get a gap insurance policy from your car dealer, but according to the Insurance Information Institute (III), insurance companies typically charge lower rates.

"In some cases, it's included in the lease payment already," Kelley Blue Book executive editor Brian Moody told CNBC Select.

In February 2024, full coverage car insurance cost about $2,545 a year, according to Bankrate data, or about $212 per month.

Adding gap insurance to collision and comprehensive coverage adds about $20 a year to the annual premium, according to the III.  

Since a leased car always belongs to the dealer, you'll have to keep full coverage for the duration of your lease.

If you've financed your car, you'll most likely have to take out full coverage, as well, but your dealer may require higher liability limits on a leased car, according to III.

And once you've paid off a car loan, you can drop full coverage in favor of minimal liability insurance. That's something to consider if your car depreciates to the point that it's worth less than ten times your monthly premium.

The average cost of a minimum liability insurance policy is only $741 a year, according to Bankrate, or about $62 a month.

Whatever kind of policy you need, Geico is a top pick for budget-minded drivers, with low rates and 16 discounts — including up to 22% off for good drivers who have gone five years without an accident.

Amica has earned high praise for its customer service, including top ranking for claims satisfaction on J.D. Power's 2023 auto insurance study. The Rhode Island-based insurer also had fewer complaints than expected for a carrier its size, according to data from the National Association of Insurance Commissioners

Whether to lease or buy depends on a lot of factors, including your personal preferences and financial situation.

Lease payments tend to be lower than loan payments, but you won't own the vehicle when the lease is over the way you would when you finish paying off your car loan.

And, since you don't own it, you have to keep a leased car in excellent condition or hit with fee for dings, scratches or stains when at the end of the lease.

A lease contract also includes an annual allotment of miles — usually between 12,000 and 15,000 — with excess mileage costing an average of between $0.10 to $0.25 per mile.

Most leases are for three years or less, so it might be an attractive option if you prefer driving a new car or you don't want to deal with the maintenance issues that mount as a vehicle gets older.

New cars usually have bumper-to-bumper warranties that last long enough to cover a lease term.

Since it's rare for banks and traditional lenders to offer a car lease loan, you would need to work with your dealership or a specialized auto-financing company to finance a car lease.

If you decide to buy, the car-loan marketplace MyAutoloan has options for those with FICO scores as low as 575. Applicants can review up to four prequalified offers without their credit taking a hit.

Capital One Auto Financing is open to borrowers with credit scores as low as 540 and approval can be made within 24 hours. You can only get financing for an automobile purchased at a participating dealership, but the Auto Navigator tool allows customers to shop online first and get preapproved.

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Both leased and financed cars usually require full coverage auto insurance. But because coverage requirements for leased vehicles are greater, you'll probably end up paying more.

The monthly payments on a lease, however, are usually lower.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Brian Moody, executive editor at Kelley Blue Book, the highly regarded vehicle valuation and research company.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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