Budgeting

Vehicle Leasing for Bad Credit Options

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 a type of funding 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. While the driver can typically treat the vehicle as if it was 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. 

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. 

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 bases 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: 

  • Bills. 
  • Loans. 
  • 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

You 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 Transfer

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. 

Car-sharing Services

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. 

Bottom Line: Leasing a Vehicle With Bad Credit

While it may seem impossible to find an 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. 

Instead of leases or auto loans, you may also consider personal installment loans from a direct lender. 

References:
Leasing vs. Buying a New Car | Consumer Reports
Vehicle Leasing | GSA
State of the Automotive Finance Market Q2 2022 | Experian