How leasing vs. financing a car affects your insurance

Buying a new car comes with a lot of choices to make, from the features you want to what warranty to go with. Once you’ve narrowed down the type of car you want, it’s also a good idea to get a car insurance quote so you have an idea of the cost. There are plenty of pros and cons to consider when it comes to leasing or financing your car. Regardless of which option you choose, here are four key ways it will (or won’t) impact your auto insurance.

What is the difference between leasing and financing a car?

Before jumping into how leasing or financing your car could affect your auto policy, it’s important to know the difference between these two terms.

When you lease your car, you’re effectively renting it for a set amount of time. Since you don’t own the car, at the end of your lease, you’ll return the vehicle. However, you’re usually provided the option to buy the car if you want. When leasing, you’ll have a leasing company, also known as a lessor.

On the other hand, when you finance a car, you’re paying off a loan towards owning the car outright. This means that once the loan is paid, the car is 100% yours. If you choose to go this route, you’ll have a financing company or a lienholder.

So, which one is better? This will depend on your needs and what you prefer

TIP: Looking to buy a new set of wheels? Check out these important tips for buying a car.

Now let’s move on to the relationship between leasing or financing and your car insurance.

1. Does leasing or financing my car impact how much I pay for insurance?

The good news is that it doesn’t matter if you lease, finance or own your vehicle because it has no impact on the cost of your car insurance. Instead, your rate is determined by a number of factors, such as the vehicle make and model, how long you’ve been a licensed driver, number of past claims and traffic tickets.

TIP: Thinking of financing your vehicle? Be sure to secure the best car loan for your needs.

TIP: If you’re not sure whether you should lease or buy, check out the Government of Canada’s Vehicle Lease or Buy Calculator to help with your decision.

2. Does my leasing or financing company need to be named on my auto policy?

When you lease or finance your car, a third party – often the lienholder, lessor or financing company – has a stake in your vehicle (aka a financial interest). This means they need to be listed as an Additional Interest on your policy. You’ll also need to provide them with proof of insurance.

TIP: If you’re a Sonnet customer, you have direct access to proof of insurance for your leasing or financing company via your Sonnet account.

Your insurer is required to advise any listed Additional Interests if you lower your limits or raise your deductibles. They’re also required to inform your leasing or financing company if your policy has been cancelled.

Heads up! A leasing or financing company can’t buy a Sonnet policy on your behalf. To help protect you from insurance fraud and for legal reasons, you must be the one to consent to and purchase your policy.

3. What coverage do I need if I lease or finance my car?

Your lessor or financing company may have specific coverage requirements for your car as a condition of your agreement with them. But, whether you lease or finance, you should have the following coverages:

Did you know? Car insurance can vary from province to province – be sure to get familiar with how it works in your region.

Accident benefits coverage. If you’re injured in an accident (no matter who’s at fault), Accident Benefits is there to help you recover. This coverage is mandatory in all provinces and territories except Newfoundland and Labrador. In Quebec, drivers are covered by the SAAQ (Société d’assurance automobile du Québec) auto insurance plan, but have the option to buy additional Accident Benefits coverage through a private insurer.
Liability coverage. This protects you and other drivers financially in case of an accident where you’re at fault. Any damages, injuries or losses experienced by another driver or individual will be covered. This coverage is mandatory in order to drive a car in Canada. The minimum limit required for liability coverage varies by province:
- Nova Scotia – $500,000 minimum liability limit.
- B.C., Alberta, Saskatchewan, Manitoba, Ontario, Newfoundland and Labrador, New Brunswick, P.E.I. – $200,000 minimum liability limit.
- Quebec - $50,000 minimum liability limit.
Physical damage coverage. This is the part of your policy that covers damage to your vehicle. Depending on your policy, this could cover you for at-fault or not at-fault accidents, as well as for damage from falling objects, vandalism, fire, theft or other perils. Since this coverage has the most significant impact on protecting the interest of your lessor or financing company, it’s often required by your agreement.

Heads up! If you’re planning to remove physical damage coverage, lower your deductible(s), or switch your car insurance over to comprehensive only coverage for the winter, this may be against your leasing or financing agreement. Be sure to check with your lessor or lienholder before making any changes to your coverage.

There are a couple optional coverages that are also recommended, especially if you lease or finance:

Depreciation waiver. This coverage is designed for new (or nearly new) vehicles. When added to your auto policy, your insurer will settle your claim without deducting depreciation (aka wear and tear) from the value of your car. In the event of a total loss, your insurance provider would pay the lowest of the following amounts:
- The actual purchase price of the car and its equipment.
- The manufacturer’s suggested list price of the car and its equipment on the original purchase date.
- The cost of replacing the car with a new vehicle of the same make and model that is similarly equipped.
Keep in mind, this coverage only applies for a certain amount of time and eligibility depends on the age of your car and its purchase condition.
Family protection. Even if you own your car, you’ll want to have this on your policy. If you’re hit by an uninsured or underinsured driver, including when driving in another province or state, you’ll be covered by your own policy limits no matter what the minimum is.

Your leasing or financing company will also require either Lessee Protection (for leased vehicles) or Lienholder Protection (for financed vehicles) on your policy.

4. How does a claim work if I lease or finance my car?

In the event of a claim, leasing or financing your vehicle can change how the claim is handled. If you lease your vehicle, the lessor is considered the car’s owner, meaning that your insurer would discuss the settlement with them instead of you.

Whether you lease or finance, if you’re in an accident where your car is a total loss, your settlement will be co-payable. If it’s leased, settlement will be sent to the lessor. If it’s a lien, it will go to you, unless the agreement with your lienholder specifies differently. If the car is worth more than you owe, then you’ll receive the remainder of the settlement. On the other hand, should you owe more than it’s worth, you’ll have to cover the rest of the costs owed.

We’ve given you some key things to think about, but it’s also important that you review your agreement with your lessor or financing company. Double check that you’ve met all of the specific insurance requirements to make sure you’re fully covered.

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