How financing a car affects your car insurance

These days there are loads of ways of buying or leasing a car, you don’t have to just buy one outright. However, given the car isn’t technically yours, not until you’ve fully paid the car lender off, the way the insurance works is different.

Find out what level of car insurance cover you’ll need if you’re financing or leasing and if you should bother getting additional cover.

Do I need comprehensive cover with a car loan or lease?

Yes, if you’re leasing a car you’re going to have to take out a fully comprehensive car insurance policy. This means if you have an accident or the car is damaged due to fire or theft, an insurer will pay out.

If you’re leasing the car then the insurance might be included in the package. Check with the company, as this isn’t a hard and fast rule.

What kind of cover do I need with a financed car?

So you might be financing a car, either through a hire purchase (HP) or through a personal contract purchase (PCP). With both you pay an initial small deposit of about 10% then you pay back the loan on the car in monthly instalments.

There are differences between the two, yet with both, the vehicle isn’t actually yours until the end of the agreement. So again you’ll have to take out fully comprehensive insurance for both of these options.

What’s gap insurance and do I need it?

Guaranteed Asset Protection (GAP) insurance is an optional policy which covers the difference between the current value of your car and the amount you owe to the finance company, or car dealer, for leasing or financing a vehicle.

As soon as you drive your new car down the road it’ll probably have lost some value, let alone after years of wear and tear. So what happens if you seriously damage or even write off a car that’s not really yours? You might get the car when it’s worth £15,000 but then three years down the line it’s only worth £10,000.

The fully comprehensive insurance will only pay for what it’s worth now, so you’d be facing having to pay the difference to the lease company out of your own pocket.

Gap insurance would make up this shortfall, as you’ll be covered for the price of the car you paid when new.

Depending on your financial circumstances and the likely depreciation of the car (if you drive it a lot), it may be worth getting a gap insurance policy.

How much does cover cost for a financed car?

How much you pay on insurance for your financed car will depend on a variety of factors. Here’s a breakdown of how your premium will be calculated.

• Personal details. Your age, where you live and medical conditions are a few reasons that impact your insurance costs.
• Driving history. If you have blemishes on your record then your policy will probably be more expensive.
• Car make and model. The type of car you’re leasing or financing will play a part. Faster, more powerful vehicles are often seen as more risky.

Does the type of car or loan matter?

Yes, both the type of car and loan can have a bearing on your car insurance. If, for example, you take out an unsecured personal loan instead of an auto loan your hands won’t be tied by your lender. You won’t have to take out gap insurance, while you can choose third party coverage instead if you really want. After all, by taking out a personal loan the car is essentially yours. While with car financing options like HP and PCP it’s not.
So insurance could be cheaper if you just get the money from your bank or a lender and buy the car outright.

New and used cars may also have different insurance costs. While you might expect new cars to have higher premiums, this might not always be the case. It could have additional safety features that make it less of a risk for the insurer.

Used cars, on the other hand, are more appealing to thieves. For one, they might lack a modern security system while there’s a demand for their parts. This can drive up insurance rates to protect against the possibility of theft.

When do I need to purchase extra cover?

If you’re financing or leasing an expensive car over a period of a few years, the chances are it’s going to depreciate in value quite significantly.

Particularly if you clock up a lot of miles. In this case gap insurance will save you thousands of pounds should you ever write the car off.

Frequently asked questions

• Is insurance included in a lease contract?

  It depends. Some providers will include insurance in your monthly package, while others won’t. Check before the car arrives.
  In any case, you’re going to need fully comprehensive insurance for leasing a car.

• My car is paid off. Now what?

  So you’ve been financing your car through a hire purchase or personal contract purchase but now it’s yours.

  Hurrah! Now you can choose your level of insurance, you can even opt for third party or third party, fire and theft cover. After all, the car is now yours.

Written by

Esther Wolffowitz

Publisher

Esther Wolffowitz was a publisher at finder.com specialising in insurance. Esther holds an MSc in Media and Communication Governance from the London School of Economics and Political Science (LSE). See full bio