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Leasing a car is a terrific method to drive the newest model and can even result in lower monthly payments than financing a new vehicle.
But, is it easier to lease a car with bad credit instead of doing a straight finance with a lender?
If you have poor credit and want to lease an automobile, it may be tough to be approved.
If you are approved, the financing cost will certainly be greater. Depending on your financial situation, it may make sense to examine alternatives, such as purchasing a pre-owned vehicle or assuming another person’s lease.
Leasing a vehicle may seem like a decent alternative if you desire a newer model vehicle or simply desire lower monthly payments than you would receive with an auto loan. However, if you have poor credit, a lease may be costly.
Some leases may impose excessive financing fees, or even worse, require you to pay for expensive repairs or maintenance.
If you are determined to lease a car with poor credit, there are several factors to consider.
What Credit Scores Are Required to Lease an Automobile?
Similar to auto loans, leases often require credit approval. A car dealership or leasing business will typically evaluate your credit history and other variables, including your credit ratings, when you apply for a lease.
According to the Experian State of the Automotive Finance Market Study, the average credit score of individuals who leased a vehicle in the second quarter of 2020 was 729, compared to 718 for new car financing and 657 for used car financing.
This difference could be due to the greater risk a leasing firm assumes when it lends you an automobile.
When leasing, you pay for the car’s anticipated depreciation during the lease term, in addition to a rental cost, taxes, and other fees.
The leasing firm assumes the risk of depreciation; the vehicle may lose value more quickly than expected due to extra kilometers, severe wear and tear, or damage.
When you own a car, though, you assume the financial risk of depreciation.
Things to Consider When Leasing a Car with Bad Credit
As you search for a lease, keep the following in mind:
High Cost of Financing
What is effectively your annual percentage rate may be referred to as the “money factor,” “lease factor,” or “lease rate” in a lease.
The money factor, unlike the annual percentage rate for a car loan, is expressed as a decimal fraction.
It is utilized to calculate your rent, which represents your cost of financing.
Low credit scores can result in increased finance charges, despite the fact that this is only one of the variables assessed throughout the application process.
This means that if you are approved for a lease while having poor credit, you may face a larger money factor.
“Lease-Here, Pay-Here” Dealerships
You might consider leasing a used vehicle from a “lease-here, pay-here” shop even if you’ve been refused by other leasing businesses.
This can be enticing, particularly if you need a car immediately, but buyer beware!
These dealerships may lease older used automobiles. Typically, you are required to make weekly or biweekly lease payments and pay a high monthly rent, and there is typically no coverage for repairs or upkeep.
Consider these dealerships only if you’ve exhausted all other options and can’t wait to purchase a vehicle until your credit has improved.
If you decide to apply for a lease at a lease-here, pay-here dealership, ensure that you fully comprehend all leasing terms and fees.
Ways to Increase Your Likelihood of Lease Acceptance Before Applying
Before applying, there are a few methods you may be able to increase your chances of being accepted.
Make an initial payment
Capitalized-cost reduction or cap-cost reduction refers to the practice of making a down payment when signing a lease.
Save money in order to make a higher down payment before applying for a lease.
This will reduce the cost of your lease and monthly payments, and it may also boost your chances of approval.
However, keep in mind that many leasing companies limit the overall amount of cap-cost reductions you can make.
Reduce the Debt-to-Income Ratio
Your debt-to-income ratio, or DTI, is calculated by dividing your monthly debt payments by your gross monthly income.
In general, a lower debt-to-income ratio is viewed favorably by lenders.
However, keep in mind that your DTI may be simply one of several factors a lender analyzes when assessing whether or not you will be able to make your monthly payments.
Obtain a cosigner
Consider asking a family member or close friend with better credit to co-sign your lease.
The presence of a co-signer might reassure the leasing business that payments will be made on time.
However, keep in mind that your co-signer is on the hook if you fail to pay, so ensure that everyone you ask is informed of their obligations.
Alternatives to Leasing a Car with Bad Credit
If you have been rejected for a lease or are unsure whether a lease is the right option for you, here are some options.
Take over the lease of someone else
If you are approved to assume someone else’s lease, often known as a “lease swap” or “lease transfer,” you are responsible for making the remaining payments and adhering to the original lease conditions.
The websites SwapALease.com and LeaseTrader.com can assist you in identifying lease-transfer opportunities.
Note: though, that you will likely need comparable credit to the original lessee in order to qualify.
Purchase a less priced secondhand vehicle
Purchasing a lower-priced used vehicle often results in a smaller loan amount, which could reduce the amount of interest you pay.
Although it depends on a number of circumstances, applying for a used-car auto loan with bad credit may be somewhat easier than leasing a vehicle.
Locate a dealer with a specialized financing department.
If you want to purchase a modern vehicle, you should pick a car dealership with a credit-challenged customer department.
Keep in mind that even if you are approved, the interest rates on these loans will likely be higher if you have a low credit score.
The bottom line
It can be tough to be approved for a lease with poor credit. And if you are approved, leasing can be costly, with substantial upfront payments and significant financing fees.
Consider restoring your credit before searching for a lease, if you have the ability to do so.