Leasing a car with bad credit may be possible for consumers who research their options and save up for their monthly payments and security deposit. It may also be easier for bad credit consumers to lease a car if they include a co-signer on their lease. If you are in the market for a new vehicle, you may be debating between purchasing a vehicle or obtaining a lease. Here, you will learn about vehicle leasing for bad credit, what your options are, and even how you can improve your credit along the way!
Car Loan vs. Car Lease
Auto loans are installment loans meant for the explicit purpose of purchasing a vehicle. Auto loan lenders are typically listed as lienholders on a vehicle’s title while the official owner pays off their loan. Borrowers gain complete legal ownership over their vehicle once they ultimately pay off their auto loan.
A car lease, on the other hand, is when a driver makes a monthly payment in order to have access to a vehicle. Approximately 20% of new cars in the United States are leased.1 While the driver can typically treat the vehicle as if it were their own when they have a car lease, they do not officially own the vehicle and may be required to abide by certain restrictions. For example, people may find that their lease agreement has restrictions as to how many miles they may drive within a given leasing term.
Should You Buy or Lease a Car When You Have Bad Credit?
Is leasing or buying a car better when you have bad credit? Usually, people with bad credit scores may be better off leasing a vehicle simply because it is more difficult for these types of borrowers to find loan approval in general. Making car lease payments on time will show up on your credit reports and may indicate to future lenders that you are a financially responsible borrower, which can help you increase your credit score for future loans. The average car lease payment in the United States is about $487 per month.2
However, if you are set on purchasing a vehicle with a loan, you can try the following to help increase your chances of approval:
- Get a co-signer
- Offer to make a larger down payment or security deposit
What Credit Score Is Needed to Lease a Car?
Can you lease a car with no credit or a low credit score? Leasing companies can vary when it comes to the type of borrowers they work with. For example, a leasing company that works with luxury vehicles may have stricter credit requirements than a company that works with more traditional everyday vehicles.
Credit scores range between a perfect 850 and a beginning score of 300. People with scores between 800 – 850 are said to have exceptional credit. People with a good credit rating between 740 – 670 are often referred to as prime borrowers. These kinds of borrowers may enjoy benefits like:
- Access to a wider variety of financial products and services. Prime borrowers make up more than 65% of financing loan and lease transactions on both new and used vehicles.
- Better chance of receiving lower interest rates.
- Higher likelihood of receiving increased loan amounts.
Lastly, people with scores between 580 – 300 are said to have fair/poor credit. This group of borrowers are often referred to as subprime. Subprime borrowers make up about 17% of loan and lease transactions on both used and new vehicles.
Whether you plan on buying or leasing a vehicle, it’s a good idea to check your credit score before you start to look around. Knowing where your credit score falls can help guide you toward the right kind of vehicle, so you don’t waste your time looking at options that won’t work for you financially.
Pros and Cons of Car Leases With Bad Credit
Before getting into a car lease or any other kind of financial endeavor, it is important to think about the potential advantages and disadvantages. Below are some of the pros and cons to consider regarding leasing a car with bad credit.
PRO: Lower Monthly Payments
According to a study done by the credit bureau Experian, the average monthly payment on a car lease for subprime borrowers is $559 a month, while the average monthly lease payment for prime borrowers is $549. Auto loans usually require higher monthly payments, with the average monthly payment for subprime borrowers being $692 while the average monthly payment for prime borrowers is $673. So, whether you have good or bad credit, you are more likely to save money on a monthly basis with a car lease over a loan.
CON: High-Cost Overall: The Money Factor
Since car leases are generally easier to come by, leasing companies tend to charge a higher interest rate than car lending companies; this trend is referred to as the “money factor.” While the average car loan is quite high, $38,802 for subprime and $41,6969 for prime borrowers, borrowers who have car leases may still pay more overall because of the higher rates.
CON: No Equity Gained
When people purchase a vehicle and take care of it, there’s a chance they may end up with positive equity after they pay off their vehicle loan. Positive equity in a car means that the current market value of the vehicle is worth more than the original balance of the borrower’s auto loan. Since people who lease their vehicle are not purchasing it outright, they have nothing to gain if the vehicle has positive equity at the end of their lease contract terms. Instead, the original dealership benefits from people taking good care of their leased cars.
Ways To Improve Bad Credit for an Auto Loan
While it can be possible to purchase a car with bad credit, you’ll have a much easier time if you work on improving your credit score before applying. The sooner you start establishing positive financial habits, the faster you may see an increase in your credit score!
Make Payments on Time
Payment history is the most important financial habit to keep in order when trying to raise your credit score. Making up 35% of your total score, payment history has the potential to affect your credit score more than any other financial category.
Your payment history refers to how timely you are with making payments on debts like:
- Credit cards
- Rent or mortgages
If you have trouble remembering to make your payments on time, try signing up for automatic payments. That way, your bills will be paid each month automatically on their due date!
Lower Your Debt-to-Income Ratio
Your debt-to-income ratio refers to the amount of money you earn compared to the amount of debts you owe. While it is nearly impossible to keep your debt-to-income ratio at 0%, financial institutions generally like to see borrowers with a ratio of no more than 30%.
Avoid Applying for Unnecessary Credit
Every time you apply for a new line of credit, your lender will request a hard credit pull. A hard credit report is a consumer’s official credit statement as reported on by one of the three major credit bureaus. Credit bureaus keep track of hard credit pulls, and they have the ability to affect your credit score. For example, a single hard credit pull can lower your credit score by up to five points. To avoid unnecessary damage to your credit score, try to only apply for new lines of credit when you really need it.
Alternatives To Leasing a Car
If you have extremely poor credit, a traditional car lease may seem like it’s out of the question for you. Fortunately, there are other avenues to explore for people with a lower credit score who need access to a car. You may consider options like:
- Lease transfers
- Carpooling with people you know
- Seeking advice from a car dealers’ financing department
Lease transfers allow borrowers to obtain a lease that once belonged to someone else. When you acquire a lease through a transfer, you are not responsible for paying off the total original balance, just whatever is left over from the previous borrower. While this means you won’t be getting a brand-new car with your lease, it can help you save hundreds or even thousands of dollars.
Carpooling is an environmentally friendly habit that can also help you save money on commuting, even if you don’t have a car. With carpooling, several people make a schedule and rotate driving responsibilities, so everybody doesn’t have to take their own car everywhere they go. If you don’t have a car and can’t participate in the driving rotation, you can offer to pay for gas or buy the driver lunch as a thank-you!
Work With Your Car Dealership’s Finance Department
Sometimes car dealers have a special financing department that specializes in working with people who have lower credit scores. These departments may be able to help you out with a discount on your down payment, flexibility on your monthly payments, or they may be able to help connect you to another borrower who is willing to do a lease transfer.
Key Considerations for Leasing a Car with Bad Credit: Beyond the Basics
|Alternative Financing Options
|– Buy-here-pay-here dealerships
– Peer-to-peer lending platforms
– Credit union loans
|Credit Improvement Programs
|– Secured credit cards to build credit
– Credit builder loans
– Online credit education courses
|– Risks and benefits of having a co-signer
– Eligibility criteria for co-signers
– Impact on the co-signer’s credit
|– Types of insurance required for leased vehicles
– Cost comparison of insurance for leased vs. purchased cars- Tips for finding affordable insurance with bad credit
|– List of car models with the best lease terms for bad credit- Comparison of lease costs by vehicle type- Impact of car choice on insurance and lease approval
|How to negotiate lease terms<br>- Understanding lease contract fine print<br>- Tips for end-of-lease negotiations
|Consequences of early lease termination<br>- Options for lease buyout<br>- Strategies to avoid penalties
FAQ: Leasing a Car with Bad Credit
Typically, the minimum credit score required for an auto lease varies by leasing company, but a score of 620 or above is often preferred. However, some lenders may allow lower scores with certain conditions.
A strong credit history usually results in better car financing terms, including lower interest rates and better lease factors. Conversely, a weaker credit history may lead to higher costs and more stringent lease terms.
Yes, you can lease a car with an average credit score. While you might not get the most favorable lease factor, many dealerships have options for those with mid-range scores.
The lease factor, similar to an interest rate on a loan, can be higher if you have bad credit. This is because lenders take on more risk and often charge more to mitigate this.
Most reputable auto lease agreements will require a credit history check. However, some dealers may offer leasing options with proof of income or a significant down payment.
To improve your chances, consider a larger down payment, a co-signer with a better credit score, or look for dealerships that specialize in financing for those with lower credit scores.
An auto lease often requires lower monthly payments compared to buying a car with a loan, which can be beneficial for someone with bad credit. However, the lease factor may be higher than interest rates offered to those with better credit.
You can request a free copy of your credit report from the major credit bureaus once a year to find out your credit score, which will give you an idea of where you stand before applying for an auto lease.
Yes, consistently making timely payments on an auto lease can help improve credit scores over time, as it demonstrates financial responsibility and creditworthiness.
If denied for an auto lease, you should review your credit report for any errors, look into increasing your down payment, or consider a co-signer. Additionally, some companies offer lease-to-own programs that might be more accessible with a lower credit score.
A Word From CreditNinja on Leasing a Car With Bad Credit
While it may seem impossible to find approval for any type of funding when you have bad credit, this isn’t always the case! When it comes to leasing cars, borrowers with poor credit have access to plenty of financial options that can help them afford a vehicle.
- Convenient monthly payments
- Friendly customer service
- Flexible repayment terms
- Bad credit scores OK
Check out the CreditNinja easy online application to see how much cash you could get today!