Personal Business

Can You Lease a Car With Bad Credit?

Have bad credit but want to lease a car, and are uncertain if you can do so? The good news: yes, you can. The bad news? There are cost implications when you apply for a lease with poor credit. Expect to spend more than someone would with good credit. 

Leasing a car has compelling advantages. These include transferring the car’s depreciation cost to the lender, reduced out-of-pocket expenses, and more manageable monthly repayments. Despite these benefits, there are certain things you should know if you have bad credit.

What Kind of Credit Score Do You Need to Lease a Car?

There isn’t a universally agreed credit score to qualify for a car lease but auto leasing companies will typically treat FICO scores of 700 or better as “good”. FICO defines a “good” score as ranging from 670 to 739. 

670 is usually considered the minimum credit score you need to secure a vehicle lease. Ideally, you want a higher credit score–preferably 730 and more. At 730+, you not only qualify for a car lease but also the lowest interest rate. 

According to Experian’s State of the Auto Finance Market Report for Q2 2020, the average credit score of those who secured a car lease was 729. That compared to 657 for used car financing and 718 for new car financing. 

Leasing requires a higher credit rating because the dealership takes on the risk of depreciation. The car may lose value quicker than initially anticipated due to extra miles, damage, and excessive wear and tear. 

This is different from when you are buying a car since you bear the depreciation risk. More on the differences between buying and leasing will be discussed later.

What to Consider When Leasing a Car With Bad Credit

A lease allows you to get a new (or near-new) car but without the high monthly payments you would need if you were buying the vehicle outright. When you lease a car, you are effectively renting it for a defined period (36 months is typical) while allotted a specific number of miles. 

The dealership will run a credit check to confirm your credit score is up to par. The better your credit score, the better the deal you get. 

If you have ugly credit, you are going to find it harder to secure an auto lease. Lenders perceive you as having a poor record of paying those you owe. Some dealerships will not consider your lease application at all. There are those that will though. 

It is important that you understand the leasing process and know what to expect if you have bad credit. At the minimum, brace for a high-interest rate and a high down payment.

High Rate of Interest

If you lease a car that costs $35,000 today but is projected to be worth $20,000 at the end of the three-year lease, you will effectively be getting a $15,000 loan. This amount is charged an annual percentage rate (APR) which is expressed as a lease factor, money factor, or lease rate.

Unlike the APR on an auto loan, the lease factor is denoted as a decimal fraction. It is used to compute your rent charge which is the cost of financing. To calculate the lease’s interest rate, multiply the lease factor by 2,400. If the lease factor is 0.0025, the interest rate is 6%. 

The lower your credit score, the higher your lease factor. 

You Might Be Asked to Pay a Higher Down Payment

A car leasing company will usually ask for a down payment. A higher down payment may be required if you have poor credit. The dealership uses a high down payment as a means of lowering their exposure when they are extending credit to what would be deemed a high-risk borrower. 

On the brighter side, a larger down payment means a lower amortization amount which in turn trims your monthly payments. Work on accumulating some savings before you apply for the lease so your application has a higher chance of approval.

Buying vs. Leasing

You cannot make an informed decision on leasing before you understand how it compares to buying a car. Of course, certain principles hold true whether you are buying or leasing. In either process, you pay a lower interest if you have perfect credit. But there are differences. 

In a nutshell, the primary difference between buying and leasing is similar to buying or renting an apartment.

Buying a car

You could buy a car outright or through a car loan. If you are buying it via an auto loan, your monthly payments will be based on the purchase price of the vehicle, the loan duration, and the loan interest rate. 

Once you pay off the loan, the lender no longer has a lien on your vehicle. Throughout the loan’s duration, you are responsible for car maintenance and repairs. 

With an auto loan, the car serves as collateral. If you default on the loan, the lender repossesses it and sells the car to recover their losses. This means when compared to leasing, you are likely to have an easier time securing an auto loan even with a poor credit score.

Leasing a car

When you lease a car, you are effectively renting it. At the end of the “rent” period, you return the car to the dealer or lender in a like-new condition. You can trade it in and get a new lease for a new car. Also, you have the option to buy the car. 

Since you do not own the car, there are limits on how you use it and what you are responsible for. Most lease agreements have a cap on the number of miles you can drive each year. They will charge additional fees if the vehicle is damaged beyond normal wear and tear.  

With weak credit, you would find it harder leasing a car than you would in getting an auto loan.

Ways to Help Improve Your Credit Scores

Bad credit can hamper your ability to secure a car lease. A good score makes getting a car lease simpler, less expensive, and less stressful. The good thing is you have the power to build your credit. So even as you look for a lease, start working on improving your score. 

The seemingly small actions you start to take could considerably expand the lease options available to you in the not too distant future and help you avoid the high costs of low credit. 

Typically, the following will be the most effective ways of improving your score.

Have Multiple Credit Accounts

Having multiple open and active credit accounts is central to establishing a good track record and length of credit history as a borrower. Open different types of credit accounts to improve your credit mix of revolving and installment credit accounts. These may include secured cards and credit-builder loans. 

Credit builder loans (often also called credit builder accounts) from companies like Credit Strong help you grow your credit score by enabling you to build your payment history with low risk. Some of the money that you pay each month builds your credit and some builds your savings. After you finish the payment plan, you can access the money in that account. 

So they allow you to build your credit and your savings! See the pricing and payment plan options here. 

Credit Strong reports your payments to the three major credit bureaus. If the payments are made in full and on-time each month, they will help increase your credit score. 

In short, credit builder loans demonstrate that you can manage making on-time payments while increasing your credit portfolio diversity.  

Always Pay Your Bills on Time

Your payment history is the most important factor in your credit score. Avoid missed or late payments. The longer your on-time payment history is, the better your credit score is likely to be. 

In case you are struggling with a payment, contact the lender or credit card company to discuss your options including rescheduling loan payments or discussing hardship alternatives. 

Do not disregard accounts that would not ordinarily show up on your credit report such as subscription services and gym memberships. On-time payments for these may not help your score, but if the accounts are sent to collections, they could cause your scores to dip.

Stay Well Below Your Credit Card Credit Limit

Avoid maximizing your credit card. Better yet, work on lowering your credit utilization. Pay down either entire balances or the high balances on your revolving credit accounts such as credit cards and lines of credit. 

Keeping your credit utilization at under 10% demonstrates you can accommodate your financial obligations without an over-dependence on debt. For example, if you have a credit limit of $10,000, keep your utilization at less than $1,000.

Avoid Hard Inquiries On Your Credit Report

Increasing your mix of credit accounts may be a good thing to build your credit file. However, each credit application you submit may lead to a hard inquiry. Each hard inquiry slightly hurts your credit score, but multiple hard inquiries can add up and have a substantial impact. 

Apply only for the credit accounts you need. You can also avoid multiple hard inquiries by shopping for multiple credit accounts in a span of a couple of weeks.

Dispute Errors On Your Credit Report

Credit reporting companies (sometimes called ‘furnishers’) are not infallible. Lenders and other organizations sending your credit information to the credit bureaus may not always relay accurate data. Check for anything in your credit report that seems off. If you identify any inaccurate information, dispute it. 

Start by contacting the company reporting the inaccurate credit information and explain why you think the information is incorrect. Include copies of supporting documents. Request that the erroneous information be corrected or removed. You can reach out to the credit reporting companies by phone, mail, or online. 

If the company reporting the erroneous information to the credit bureau doesn’t take action on your request, you may want to file a dispute directly with a credit bureau. If you file a dispute with a credit bureau, the bureau must investigate the dispute, forward the documents to the furnisher, and share the results of the investigation with you. 

If the furnisher corrects the data after your dispute, they are required to update all credit bureaus they sent the information to so that they can update their records with the right information.

Bad Credit Does Not Automatically Imply No Car Lease

Whereas you can secure a lease with bad credit, it may take significantly more time and research to find a good deal. Expect to pay a higher down payment, a higher interest rate, and higher monthly repayments. 

To cut your costs, consider workarounds such as getting a co-signer, leasing a used vehicle, or trading in your current vehicle.  

You may also explore taking over someone’s lease. Sites like LeaseTrader and SwapALease could match you with someone keen on getting out of their car lease. A credit check is still required but the interest rate and down payment may be more favorable.

In case the higher costs are unaffordable or if the workarounds are not available to you, consider waiting for your credit to be in better shape to qualify for a better deal.

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