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Low, low payments -- on the car, anyway

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CarInsurance.com

Rich guy in carCar leases were hard to arrange during the depths of the recession, but they have made a remarkable comeback.

In 2009, about 10 percent of all new car sales were financed with leases. Today, according to Experian Automotive, leases comprise nearly 25 percent of the market. But the typical lease now is:

  • Shorter. According to Edmunds.com, the average term has dropped from 42 months to 36 mainly due to 24-month leases becoming more common.
  • Cheaper. The average monthly payment has dropped to $412 from $432 and the money factor (interest rate) has almost been cut in half, falling to 2.8 percent from 4.9.
  • Less generous. The number of miles included is also dropping, from an average of 13,000 down to 12,000. Some automakers are even offering leases with as little as 10,000 miles a year.

Yet even these cheaper leases require additional car insurance.

State laws govern minimum requirements for all car owners, but leasing companies, as the titled owners of the vehicles involved, get to dictate their own requirements. A new survey from lease-trading site Swapalease.com finds roughly 40 percent of leaseholders carry even more car insurance than their agreement requires.

But others might find that a lease allows them to drive a car they can't easily afford to insure.

Low, low payments, but not for insurance

A recent college grad going from an old car with state minimum coverage to a new car with full coverage could be in for a shock.

A 25-year-old woman living in Oakland, Calif., would pay about $610 a year for minimum liability coverage on a paid-off 2002 Ford Taurus, assuming a clean driving record and no accidents. But upgrading to a shiny 2013 BMW 3-series and appropriate full coverage (comprehensive, collision and 100/300/50 liability) would cost her about $3,285 a year.

In 2010, LeaseTrader.com found that the number of people trying to get out of their leases because they did not understand how the new car would affect their insurance rates was 4.5 percent of its transactions, up from 2 percent in 2009.

Terminating a lease early can be difficult and expensive; most leasing companies require you to pay all remaining payments as well as early termination fees.

Services such as Swapalease and LeaseTrader can help find a buyer for those leases, charging buyers an upfront fee. The original leasing company will charge a transfer fee that usually tops out around $600, Swapalease spokesperson Scot Hall says. The company arranges about 10,000 lease transactions a year.

So how much do you really need?

All leasing companies will demand that drivers have full coverage -- comprehensive and collision -- to pay for a vehicle that is totaled or stolen, says Penny Gusner, CarInsurance.com consumer analyst. "They usually will set a maximum deductible, too," she says. "One thousand dollars is common, but some require as low as $500."

Leasing companies also ask for liability coverage far beyond what the state wants. Some states require as little as $12,500 in bodily injury liability insurance and as little as $5,000 in property damage liability. (See a map of state minimum insurance requirements.)

But leasing companies demand much more, usually $100,000 per person to cover those injured and $50,000 to repair damage to other cars or property.

Hall speculates that the large number of drivers who exceed even those standards may have to do with the fact that luxury vehicles are leased at a much higher rate than regular cars. According to Hall, some luxury brands experience lease rates as high as 50 percent of all sales. A more affluent buyer might have more assets to protect, he says.

The additional coverage also protects the leasing company. Chicago attorney Michael Helfand, who runs a legal referral service, says in some situations lessors can be held liable for damages if the driver of the vehicle is not adequately insured.

And always cover the gap

Most leases require a small down payment or, in many cases, none at all. That means vehicle depreciation will quickly outpace payments, leaving a huge gap if you are involved in a serious accident.

Insurers don't care how much you owe on the vehicle; they only pay the fair market value at that time it was totaled.

That's why gap insurance is a must with a lease, says Gusner. In most cases it is mandatory and built into the lease, and it's often a good idea for people who are buying rather than leasing, she says. (See "What you need to know about gap insurance.")

Gap insurance pays only if the car is totaled, and only if the car's actual cash value is less than the amount owed to the lienholder. If you have a choice, gap coverage is typically cheaper through your insurance company than through your lender, Gusner says.

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