You can lease a car if you have spotty credit, but it won’t be easy — and you probably won’t get the alluringly low lease payments you see advertised.
Lenders group credit scores, which range from 300 to 850, into categories or tiers that can vary. But generally a score down to 660 or 670 is still considered good enough to qualify for a lease, though it may have terms less favorable than for credit deemed excellent or very good. Some dealers and leasing companies, which are often the finance arms of the automakers, might be stricter.
“Premium brands are a little more picky,” said Michael Sin, co-founder of Leasehackr, a social site dedicated to car leasing and automotive financial literacy. How low can you go and still get a lease somewhere? “Down in the 600s … maybe,” Sin said, but at that point the cost of the lease — if you get one — might be hard to justify.
A primary draw for leasing is the potential to drive a new vehicle with the latest features and technology on a monthly payment that’s lower than you’d pay to finance the same car through a traditional loan. You get a fixed cost for a period — typically 24 to 36 months — during which the car is backed by its new-car warranty to cover any problems. (It’s a dubious idea to lease a car for longer than its bumper-to-bumper warranty.) And if the car is worth less than predicted when you return it, that’s not your problem.
“Leasing can be a great option for someone with great credit,” Sin said. “You’re leveraging cheap money and low interest rates. And the bank is taking the depreciation risk.”
About a third of all leases in the second quarter of this year went to shoppers with top-tier credit scores above 780, and some 83% were above 660, according to the quarterly auto finance report from credit reporting agency Experian. Among the top 20 most leased brands, all of those that did more than half their business via leasing were premium brands.
Low Credit Equals Higher Payments
It will be a lot harder to find value in a lease if you start with a lower credit score. The low lease payments advertised generally apply only to those with excellent credit. You should see your score to know what to expect before you start shopping for a lease. The three major national credit reporting agencies (Equifax, Experian and TransUnion) offer free reports from a single site. Usually, you can access your score once every 12 months, but under special pandemic rules, you can check your reports as often as once a week through April 2022.
A credit score rates the risk a lender takes on, so qualifying for a lease contract with a lower score can be harder than qualifying for a loan.
“Leasing works differently than taking out an auto loan because you are responsible for the entire value of the car plus the associated interest (yes, you are charged interest in a lease),” wrote Phil Reed, automotive columnist for NerdWallet, a personal finance site. “So, a poor credit risk would have a difficult time qualifying for a lease.”
And the cost of the lease can be much higher. A lease payment is based on the predicted depreciation — the loss of value over time — for the leased vehicle, but it also includes the equivalent of an interest rate, or a “money factor” in lease terminology. The leasing company is, in effect, lending you the money to cover the vehicle’s predicted depreciation, and you should know the money factor you’re being charged before signing any lease.
The money factor is typically quoted as a tiny fraction, but it’s a formula that tracks with lending rates on a traditional auto loan. Multiplying the fraction by 2,400 will give you the rough equivalent of your interest rate. That rate can be a lot higher for lessors with lower credit scores.
Sin says that a typical money factor for good credit right now equates to about a 3% interest rate. Leasing companies group credit scores into tiers that get much worse money factors at lower levels, if they can get a lease at all.
Other reasons may exist to be cautious about leasing with shaky credit. A lease will affect your credit rating similar to other new debt. Your debt-to-income ratio, a significant component in your credit rating, factors in the whole amount due on your lease. And if you run into financial problems down the road, it’s harder to get out from under a lease than a loan, where you could potentially sell the car.
“If you’re locked into a 36-month lease, that payment is locked in there,” Sin said.
Leases also carry the risk of more money due at the end of the lease if you exceed the allowed mileage (generally from 10,000 to 12,000 miles per year) or turn it in with more than normal wear and tear.
Can You Minimize the Higher Costs?
Even with pristine credit, you should do your research for a good lease and be ready to negotiate. It’s even more important if you’re handicapped by spotty credit. Cars.com has more resources on negotiating a lease, and Leasehackr and other sites offer information on lease deals and promotions, including a calculator to compare offers. For comparison, you can use Cars.com’s loan calculator to figure what you’d spend overall to buy the car with a loan instead.
“Getting informed is the way to get a good lease so you have the lowest total cost of ownership,” Sin said.
You also might be able to work with the dealer to improve your money factor for a lease and lower the payment. If your score is close to a higher tier of credit, some automaker leasing units will let a dealer request a bump to the higher category, which can secure a lower money factor, to close the deal.
An alternative path to lower lease costs would be to line up a co-signer with excellent credit. If that person has top-tier credit, you could get their rate on the lease instead of yours. But beware that your friend or family member (along with their pristine credit rating) will be on the hook for your lease if you run into problems paying.
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What About Leasing a Used Car?
Used-car leases are rare and can be just as difficult for bad credit. Some automakers and dealers offer lease programs for used cars, especially among certified pre-owned vehicles.
“There was a period of time when some of the [automaker finance units] had decent used-car programs,” Sin said, but those days have passed. “There isn’t the same sort of savings as before, and they have the same sort of credit requirements.”
And while a used-car price would be lower, the required fees at the beginning and end of a lease will be just as high. Plus, the money factor — the interest rate on the lease — will likely be higher for the used vehicle, as it is for loans on used cars. Other drawbacks might be various limits on the models, mileage and age of used cars that a lender allows you to lease. Finally, leasing a car whose warranty has expired could leave you on the hook for repairs.
Another way to get a used car — a lease transfer (taking over someone else’s lease) — may not be a back door into a better lease deal. A low credit rating can still be a problem.
“Lending companies use the same sort of criteria for lease transfers, unfortunately,” Sin notes.
A Better Idea
If the main reason you’re looking at leasing is to get a lower monthly payment on a car you otherwise couldn’t afford, a better idea might be to shop for a cheaper new or used vehicle that you could buy on the payment you can afford.
“If you are a poor credit risk, you should probably focus on rebuilding your credit,” Reed said, suggesting the best way to do this is to take out an auto loan and pay it off on time. “After a year of making on-time payments, you can think about refinancing at a lower interest rate” for a still lower payment.
At the end of the loan, you’ll own a vehicle that you could use as a down payment on something new. Your improved credit also will help put a lease deal, or a better loan, on the table next time.
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