Owning a new car is a luxury. From the fancy bells and whistles to that new car smell, a new ride can add confidence and convenience to your life. How amazing would it feel to drive off the lot in a car that had never been driven before? Hey, we all dream about it! But buying a brand new vehicle requires careful financial planning and research. Then, even if you manage to find the car of your dreams, there are additional costs behind the price tag. Local and state tax, registration and licensing, and interest charges can all hike up the price.

These intimidating costs don't have to crush your dream of cruising down the road in a beautiful new set of wheels. How can you get behind the wheel of a new car without this large financial burden? Consider leasing a car! With this route, you might be able to drive a brand new model for much less than you thought. Here is what to consider when deciding between buying and leasing a car and what to know about car insurance when leasing.

Leasing vs. Buying a Car

How does leasing a new car differ from buying one outright? It's important to think in the long-term and how driving habits and credit should also factor into the decision. Here are some key differences between financing a leased car and financing a car loan.

Monthly Payments

Let's take a look at just how different the basic monthly payments for buying and leasing can be. For a car listed at $23,000, we want to compare what it would cost to lease at 6% or take out a loan at 6%. In this scenario, what we see is that the lease offers our driver the chance to pay 42% less in monthly payments than the driver with a loan. That's a pretty serious opportunity to save!

According to U.S. News a lease vs buy comparison could look like this in the end:

Lease vs. Loan Payment Comparison
	Lease, 6%	Loan, 6%
Car price	$23,000	$23,000
Down payment	$1,000	$1,000
Interest rate	6%	6%
Residual	$11,000	N/A
Months	36	36
Payment/Month	$388.06	$669.28

Upfront Cost

Another key difference in leasing versus buying, outside of monthly payments, is the upfront cost. If signing away a large chunk of money is difficult to do, leasing will probably seem like a more manageable option. Usually with a car loan, 10-to-20% of the price is required upfront. For a $25,000 car, that cost would be $2,500 to $5,000. Similarly, when dealers advertise very low monthly payments for leasing vehicles, they're usually anticipating a large down payment which often is not the case for buyers.

Your first payment can vary greatly depending on what your lender requires up front, so it's important to be direct and clear with your lender when considering either a lease or a loan.

Sales Tax

Likewise, sales tax will be a big factor before you are able to drive your new car off the lot. This is where leasing could save you a bundle, depending on which state you lease in. When purchasing a car, you must pay the full sales tax on the price of the car, which is could easily a few thousand dollars.

Since the cost of a leased vehicle is considered a fixed asset, taxes tend to be significantly lower. This relies heavily on state laws, however. For example, in Illinois, Georgia, Texas and others, you must pay sales tax on the full price of the vehicle you lease, just like you would if you were buying it. Sometimes personal property tax also comes into play. Other state policies spread taxes throughout monthly payments. Check with your lender to see if you have options of how you pay taxes on your leased vehicle

Car Insurance When Leasing

Whether you're leasing a car or buying a car, one thing will not change: you need car insurance coverage.

Just like any car, insurance on leased cars is a must. A leased car requires at least the state minimum amount of insurance coverage (or financial responsibility) to stay legal, so leasing companies might even require higher than the state minimum, which is the lessee's responsibility. The lienholder wants to make sure that their investment is protected in case the vehicle is significantly damaged or completely totaled, so most auto loan finance companies will not allow you to purchase liability-only coverage.

This means you will have to shop for low auto insurance rates just like you would for a car you purchase. Your lender should explain to you what insurance is required and what is included in the contract. Then, you can determine what you need (including optional coverage) and find the best insurance for you.

G-A-P Insurance When Leasing a Car

A common feature of a lease is built-in GAP coverage, or Guaranteed Auto Protection. This protects you from having to pay the difference in current market value compared to what you owe on the car in case the leased car is stolen or destroyed before your payments are completed, or if the estimated value turns out to be less than expected at the beginning of the term.

Whether looking to lease or buy a new car, it's important to consider the financial implications of your decision. Leases can have significantly lower short-term costs but gradually build to a higher long-term cost. Buying is generally just the opposite, offering high short-term costs. Regardless of your personal decision, all drivers should consider how they treat their vehicle, their travel needs, credit, and driving history before determining the best financial option for them.

Whether you lease or buy a vehicle, Direct Auto can get you the coverage you need. Call 1-877-GO-DIRECT, Request a quote online or visit a Direct Auto location near you for a free quote!

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