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You need a car for work, family, or other reasons, but you can’t get financing to buy a car because of your poor credit history.
So, you’re considering leasing.
Leasing is popular in the United States. According to Statista, more than 30% of new vehicles in the United States are lease vehicles. It’s not surprising that you are exploring leasing a car as an option.
The question is, how easy is leasing a car with bad credit, and is it really the best option for you? Read on to find out.
Why Lease a Car?
You need a car but can’t afford to buy a car outright. Even if you had a good credit score, the cost of monthly payments would be high. Leasing a car could be the answer to your problem.
When you lease a car, you don’t suffer depreciation on the asset. Maintenance costs are often paid by the leasing company. The cost of car ownership is less, primarily because of how leasing works. It sounds great – but is it really?
Certainly, in the short term, leasing is a good option. You get to drive the latest model, and low monthly payments boost your cash flow. If you lease for only three years, the car is still under warranty – then you simply switch to a new lease, with a newer model.
However, if you plan to lease one car after another over a long period, you certainly pay for the benefit of always driving the latest model under warranty. Over the long term, leasing is expensive – though you may be fooled into thinking it’s cheaper.
The Real Cost of Leasing
Let’s say you lease a car, with a down payment and fees of $2,000 and a monthly payment of $200. After three years, you switch to a new model. Over six years you will have paid:
- $4,000 in down payments and fees
- $14,400 in monthly payments
- A total of $18,400
If you had bought instead, you may have paid a down payment of $4,000, and paid the balance of $16,000 through an auto loan with an interest rate of 3.5%. Your monthly payment over five years is $291. In total, you will have paid:
- $4,000 in down payments
- $ 17,460 in auto loan payments
- A total of $21,460
It certainly appears that leasing is the cheaper option, even over six years. It looks as though leasing the car is $3,060 cheaper.
However, the car owner now has an advantage. He owns the car. He doesn’t make any more payments, and has a car valued at $7,460. He could sell the car. Buying would now have cost him only $14,000 over the six years. In this example, buying the car leaves you with $4,400 more in your pocket.
If you kept the car instead of selling the car, you no longer need to make auto loan payments. You would be $200 better off each month – plus you no longer need to make a $2,000 down payment every three years.
How Does Leasing a Car Work?
Despite the clear financial disadvantage of leasing over the long term, you may still choose to lease over the short term. Let’s look at how leasing works.
In simple terms, you drive a car from the showroom and make payments on it. When the lease runs out, you return the car to the dealer. The payments you make are the difference between the car’s value when you drive it away from the dealer and its value when you return it. Plus, profit for the dealer.
During the lease, the legal owner of the car is the company financing the lease. As the lessee, you are the authorized operator – and you will be responsible for paying all the costs associated with the car, such as parking violation tickets, local property taxes, etc.
Your leasing agreement is also likely to include that you are responsible for maintenance. You may also be billed for any maintenance or repair work needed when you return the car.
So, there are three parties involved in a lease agreement:
- The dealer, who sells the car to…
- The leasing company, who leases the car to…
- The lessee, who is responsible for payments and day-to-day costs.
The Pros and Cons of Leasing
Before we look at how your credit score affects car leasing, it is worth ensuring that you understand the pros and cons of leasing.
- Lower monthly payments – Usually, you will pay less per month to lease than to buy
- Lower down payment – A lease agreement can often be signed with a low (or no) down payment
- Latest model – You will get to upgrade to the latest model at the end of your lease
- Warranties – You can drive a car that is always under warranty, providing your lease does not extend beyond the warranty period
- Tax benefits – If using your car for business, or if it leased through your company, you may write off some of the costs against your taxes
- Lease-end options – You usually have three options at the end of your lease: hand the car back, exchange it for a new lease car, or purchase the car
- You have no equity in the car – At the end of the lease, you have now ownership, and therefore cannot redeem any of the car’s value.
- Mileage and condition terms – You will have a limit on the number of miles you can drive, with penalties if you drive more. There are usually penalties attached to the condition of the car, too.
- Difficult to cancel – Your lease agreement is for a set term, and there may be heavy penalties if you wish to end early.
Usually, the dealer has only one leasing company that it works with, meaning that you have no choice of finance. Finally, don’t forget that over the long term, leasing is more expensive than owning.
What Credit Score Do You Need to Lease a Car?
Because leasing a car is a financial agreement, and you are receiving something of value for payment, the leasing company will check your credit score. According to Experian, the general rule is that you will need a credit score of 670 or more to secure a lease.
NerdWallet helps users to compare different financial products offered by banks, insurances companies, and other financial services companies. It helps you to undertake some serious financial research before deciding which finance provider to apply to. It is easy to use and has a range of financial calculators to help you assess the real cost of loans, mortgages and other credit.
Credit Karma is a service that allows you to check your credit score, without paying for a credit check – so you can be sure you have the credit score you need before applying for credit.
Using NerdWallet and Credit Karma together, you can assess your credit score against a range of lenders and ensure you apply to those companies that will be most likely to accept you. It’s a great way to check out car leases and save time.
What Difference Does Bad Credit Make When Leasing a Car?
According to Experian, and as published in NerdWallet, the average credit score of people taking a new car lease in the third quarter of 2019 was 725. However, more than one in five had a credit score below 660.
A bad credit score makes it more difficult to get a car lease. You will probably be asked to pay a larger down payment, and your monthly payments are likely to be higher. You may also find that your choice of cars to lease is restricted because of the lease terms your bad credit score restricts you to.
All in all, a triple whammy of bad side effects because of a bad credit score:
- You may not be driving the car you desire
- It could be more expensive than you thought
- Your savings will be depleted more than you expected
Leasing a car with a bad credit score could be more expensive than buying a car with a good credit score – and the lower your credit score, the higher the chance you will be refused a car lease.
3 Ways to Improve Your Chances of Leasing a Car with Bad Credit
If you have bad credit and must lease a car, there are ways in which you can improve your chances of leasing a car. Here are three of the surest:
Make a larger down payment
Offering to make a larger down payment could improve the chances of being approved for a car lease because the amount of the lease and the monthly payments will be decreased. You’ll have to save more – cutting your expenses or taking a second job that earns big tips will help you do this.
Reduce your debt to income ratio
Your debt to income ratio is a measurement of how much of your income you are spending on debt repayments. The higher this figure, the less likely you are to get a car lease, because the leasing company will consider that you’ll find it more difficult to keep up payments on the lease.
To reduce your debt to income ratio, you must either pay off debt (start with expensive credit cards) or increase your income – preferably both.
Have a co-signer
If you can get someone to co-sign, this will give the leasing company extra confidence that the lease payments will be made – because if you default, the responsibility for payment will fall on the co-signer. If you decide to get a co-signer, the credit check rules remain, and you must make them aware of the responsibility (and risk) they are taking.
So, Is Leasing a Car with Bad Credit Possible?
The answer is yes, it is possible to lease a car with bad credit. However, if you do so, the choice of car available to you will be restricted, you are likely to need to pay a larger down payment, and your monthly lease payments are likely to be higher. Leasing a car may not be the cheap way you thought it’d be to drive.
Leasing a car for a long time is more expensive than buying, so this will affect your wealth-building potential. Whether buying or leasing a car, you’ll get the best financing deal by improving your credit score. To do this, follow these credit hacks:
Keep credit utilization low
Use only a small amount of the credit available to you.
Don’t close cards
Long-term credit accounts, if managed well, affect your credit score positively.
Pay off debt
Two-thirds of your credit score is determined by your payment history and credit utilization. Paying off your debts will help build your credit history.
Always pay bills on time
Ensuring that you are never late with payments is one of the easiest ways to build your credit score.
Reduce debt to income
The higher the ratio (the more debt you have in comparison to your income), the lower your credit score will be.
Use your credit accounts sensibly
Manage your credit accounts sensibly. Don’t overborrow and do pay your bills on time.
Increase credit limits
Increasing your credit limits will reduce your credit utilization – providing you don’t use the extra credit available to you.
Remove negative items from your credit report
When you check your credit score, if you see items that should not be there you should have them removed.
Don’t apply for new credit too often
Each time you apply for new credit, the lender will carry out a hard check on your credit score. The more hard checks that are made, the lower your score will fall. Get over this by conducting a soft credit check on Credit Karma before applying for credit.
Get the best financial products
Seek out the best products for your situation. Use a service like NerdWallet to ensure you do this.
Read our post ‘10 Credit Hack Tactics to Give You a Perfect Credit Score’ for more information on how you can improve your credit score.