Your current vehicle is ready for a trade-in. You have scouted the car lots and seen several models that caught your eye. The price tags are a bit high, but you can always finance the balance if necessary. Now you face another question: what type of contract will I use to gain ownership of my new vehicle?

When you want to own a new car, you have two options. You can purchase the vehicle, either with cash or by financing, or you can lease the same car for a period of one, two, three or more years. The decision to lease versus to buy is not one to be taken lightly, as leasing will incur several additional expenses for the consumer over purchasing, including a higher price for automobile insurance.

Customers who buy a car usually intend to keep the vehicle for a number of years after the car is paid off. This makes good economic sense if you would rather spend your money maintaining and repairing a car with no payments. Buying a car also means that when the car is paid off you have a tangible asset against which you can borrow money if necessary or sell to make some needed cash. Leasing, on the other hand, is usually employed by people with no intention of keeping the vehicle, and means that the customer plans to turn the car in at the end of the lease period and lease another new car. This makes sense if you prefer to make a car payment every month for a warranty-covered vehicle rather than take on the cost and problems of auto repairs.

There are benefits to both leasing and buying, but one of the disadvantages of leasing is that you will pay more overall for car insurance coverage. There are several reasons leased vehicles are ultimately more expensive to insure.

Why are leased vehicles more expensive to insure?

First, customers who lease tend statistically to file more insurance claims than those who buy their vehicles. This is because when you have owned a car for eight or ten years, the market value of the vehicle is so low that it is cheaper to repair the car yourself if you have a “fender bender” than to file a claim with your insurance company and risk higher premiums. Premiums also tend to be lower for older vehicles, so your car insurance simply does not cost as much after you have owned your vehicle for a few years.

Leased vehicles, on the other hand, tend to be brand-new and cost far more to fix than “old clunkers.” Therefore, any accident will probably result in an insurance claim for repairs. Lease customers also have an obligation to turn in a leased vehicle in the same condition in which they received it; the owner of an older car may decide to let a few bumps and dings stand and simply ignore them.

Customers who lease vehicles also face the prospect of insuring a new car every few years, with the attendant rise in car value and higher insurance costs. If you own your car, you can take advantage of depreciation to lower your insurance rates; if you lease, depreciation will not usually be a factor in your automobile insurance premium costs.

Another reason leased vehicles are more expensive to insure is that most leasing agencies require that the customer carry “gap” coverage as well as full coverage on the leased vehicle. Gap coverage pays the difference between the market value of the vehicle and the payoff of the lease if the vehicle is “totaled.” In other words, if you owe a balance of $27,000 on a lease, but the car is a year old and worth only $23,000, you will be responsible for the $4,000 balance on the lease agreement if the car is totally destroyed in an accident. Gap coverage pays that difference for you, but you have to pay premiums on the gap policy in order for it to be in effect.

From a financial standpoint, leasing is usually more expensive than buying. While you usually do not have to have a down payment to lease, and the payments may actually be lower than financing the purchase price, you will ultimately pay more in insurance premiums, and at the end of the lease you will still have to pay the “residual” to own the car; this is often a higher price than you would pay for a similar make and model if you bought it outright. The primary reason for leasing a vehicle is to have a new car every few years; if you can manage with an older vehicle, purchasing is usually the better option in terms of price and the cost of insurance coverage.