Leasing a Car with Bad Credit: What You Need to Know

One of the more interesting things you discover while traveling outside the United States is that people don’t need cars there. In many countries, possible destinations are much closer together, sidewalks are broad and well-maintained and public transport is actually pleasant to use. In fact, many European politicians cycle to work.

In America, though, a car is often as essential as a phone or health insurance, even if this means you have to try leasing a car with bad credit. This will generally mean lower monthly payments and may be easier on your budget than an auto loan, but how are you supposed to go about this? What drawbacks should you be aware of?

What Happens When You Lease a Car?

For such a popular option, surprisingly few people understand what it really means to rent cars to own. As with an auto loan, you’ll have to make monthly payments to keep driving it (and these monthly payments depend on your credit score). In both cases, you will usually also have to make a down payment, especially if you have poor credit.

• If you buy a used or new car, you will probably take out a loan: you pay extra for the privilege of borrowing money, and how much depends on the interest rate you can negotiate. You own the car, but the bank reserves the right to take it back if you can’t cover your payments.
• Under a lease, however, the leasing company (which may be a bank, part of an auto manufacturer or a dedicated business) retains ownership. Many of them let you hire cars to rent to own after the lease period expires (i.e. you buy it from them for some sum), but while you’re leasing, you’re essentially borrowing a car instead of money to buy one. You can’t, for instance, take out a title loan on it.
• Most of what you pay during this time compensates for how the value of the car declines while you drive it, called depreciation. A kind of interest payment, called the money factor, is added to this.

• In other words, you can pay almost half the value of a new car over a four-year lease period without owning so much as a rivet at the end. In addition, since the leasing company is eager to get their vehicle back in one piece, you may have to pay extra for comprehensive insurance and a maintenance plan.

Credit Scores, Auto Loans and Rent-to-Own Cars

Without a doubt, higher is always better when it comes to your credit score. However, it’s not like there’s a set-in-stone cutoff point for leasing a car with bad credit.

According to the credit rating agency Experian, the average credit score of people leasing a car in 2018 was 724, compared to 715 and 659 for those who took out auto loans for new and used cars respectively. All of these credit scores basically fall into the “Prime” category, but keep in mind that averages can be misleading. For one thing, individuals with a high income, little debt and a good credit score will tend to replace their cars more often, skewing the statistic.

Don’t be discouraged, in other words. As long as your score is over 600 (or even below), you can indeed lease a car despite a bad credit history. You may have to settle for a cheaper model or even a used car, shop around more, consider independent “lease here, pay here” dealerships, and accept a higher financing fee or down payment. Still, many people with a low credit score have managed to sign a lease. As more people come under financial pressure in 2020 and fewer cars are sold, a bad credit score will increasingly become less of a burden when looking for a lease.

Leasing a Car vs. Buying a Car with Bad Credit: Which Is Better?

The number-one reason consumers prefer leasing to hunting for a car loan is a strained budget: monthly payments are usually lower when you lease a car, even with poor credit. On the other hand, however good the monthly payment looks on an ad, this can be a trap: you may have to fork over a prohibitive sum as a down payment, settle for a used car, or not have access to a car rent-to-own option.

In the end, the decision on whether to buy or lease a car really comes down to your personal circumstances, preferences but also certainly the numbers. Calculating exactly how much you’ll have to pay at the beginning, end and during your lease can get confusing if you’re not familiar with the terms; luckily, there are a number of online calculators to help you out.

Cons of Leasing with Bad Credit

• Over the long term, leasing is almost certain to be more expensive, unless you want to drive a new car every 2 to 4 years.
• Speaking in general, low credit makes it more difficult to get a lease than a loan.
• Particularly at less scrupulous companies, you may be hit with significant penalties at the end of the lease period for damage to the paintwork, driving more than your contract allows (perhaps 15 cents per mile!), etc.
• You’ll not be allowed to personalize your car in any way, for instance installing a new sound system or changing the upholstery.
• When you say goodbye to a car you lease, you don’t get any compensation back to use on a new down payment.
• Buying a somewhat battered, used car without contacting a lender may work out cheaper – just remember that insurance payments on these cars can be surprisingly high.

The Pros of Leasing If Your Credit Is Poor

• The down payment on a lease is typically less than that on an auto loan, as are the monthly installments.
• A lease can therefore let you drive a better car than you can afford to buy.
• By selecting a shorter lease period, you can drive a different car every year or two.
• A leased car is usually fairly new and has strict maintenance requirements, so it will be more reliable than a used car.
• If you can no longer afford the monthly payments, your leasing company may allow you to transfer the lease to another driver.
• People with bad credit can improve their credit score by keeping up with lease payments.
• If you drive only infrequently or for short distances, it may be more affordable to lease a car instead of buying.

Tips and Tricks to Successfully Lease a Car with Poor Credit

Now we get to the heart of the matter: how to negotiate a lease despite a bad credit score. Credit scores will always, unfortunately, impact what kind of deals are available to you. If you want to lease a car, however, doing a couple of things right will improve the chance of your application getting approved on better terms:

• Your credit score may well be lower than it should be! Get a free credit report a few weeks before applying for any loan or lease; you may well notice mistakes or even identity theft.
• Even if your credit score is bad or nonexistent, you can plan ahead and take out a “builder loan” a few months in advance. This is just a personal loan you make sure to pay off on time; it’s a good way of improving your credit and may be enough to push your score into another bracket.
• Credit scores are the easiest way for a car lease provider to make a yes/no decision, but it’s not the only factor that counts – bring along your salary stubs, bank statements, point-free driver’s license, etc.
• If all else fails, you may be able to find someone with a better credit score to co-sign the lease. This means that they’re on the hook for any payments you miss.
• Know the value of your chosen vehicle before you even start comparing deals. The Kelly Blue Book is your go-to resource here.
• Once you know this number, negotiate the sale price of your preferred vehicle before you tell the dealership that you plan to lease – this will make things easier later.
• The vehicle’s value at the start and end of the lease period are important, but don’t be afraid to haggle over smaller items like finance charges – agents have more leeway here, and this number is often jacked up for someone with bad credit.
• Remember that Murphy is always on the prowl. However attractive a deal looks, make sure the lease agreement spells out exactly what will happen if your car is stolen or totaled. In some cases, you’ll lose your down payment since insurance will refund the vehicle’s owner, and that isn’t you.
• Even assuming you don’t wreck it, you don’t know where you’ll be in a few years. It’s always good to include a car’s rent to own clause in your contract in case you end up loving the clunker.
• In case you want to return the car after leasing, watch out for penalty payments, including for exceeding the number of miles you’re allowed to drive, terminating the lease early or handing it back in bad condition.
• If you’re self-employed, be sure to ask the salesperson about business car leasing plans, which are often cheaper.

How Does a Car Lease Affect Your Credit Score?

Leasing a car in spite of a bad credit score is not a step to take lightly: many people have thought something along the lines of “Oooh! For just $50 more a month I can get the shiny one!” and ended up harming their creditworthiness even further. On the other hand, getting a lease instead of buying can actually boost your credit score.

A credit score is a simple number but reflects a complex calculation; the basic idea is to estimate how likely a person is, based on past behavior, to repay money they owe. Many people have let their credit slide, often through no fault of their own. The only way to rebuild it is to show banks and other lenders that you are a responsible consumer. The quickest method, apart from drastically improving your income, is to take on an obligation such as a loan and simply make the payments in full and on time.

Car Leases and Credit Scores

One way of doing this is to sign a lease as a medium-term solution until your credit score reaches the vicinity of 700. At this point, you will qualify for a better interest rate if you choose to buy a new vehicle and better terms on a new lease. To follow this strategy successfully, there are a couple of things you need to do and plan accordingly:

• In terms of the effect on your credit rating, leasing a car is exactly the same as buying one on credit.
• It’s important not to get a lease so expensive that it severely impacts your debt-to-income ratio: the amount you spend on paying back loans divided by your salary.
• Don’t miss a payment (duh), and certainly not for longer than 30 days. To ensure you can keep up with them, you may need to choose a cheaper vehicle, pay a larger sum down or otherwise reduce the amount of money you need to pay each month. This will also make it easier to get approved even with low credit.
• Make sure the place you lease from reports to credit rating agencies – many smaller “buy here pay here” dealerships that offer leases don’t bother, depriving you of this bonus. Also remember that there are three of these bureaus – Experian, Equifax and TransUnion – and some companies will communicate with one but not the others.
• Transferring a lease you can’t afford will usually cause you to be charged a penalty fee, but doesn’t hurt your credit as much as default.

Final Words

Bad credit does limit your options when it comes to getting a car, but it’s not an impassible obstacle. By doing your research and playing your cards right, you can indeed get some wheels leased and even improve your credit by doing so – though you’ll still pay more than a person with stellar credit.

Have any of you gone through this process? If you have any further tips, we’d love to see them in the comments. Thank you for reading!