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If you’re dreaming of a newer-model car or just want lower monthly payments than you might face with an auto loan, leasing a vehicle might seem like a good option. But if you don’t have good credit, a lease could be expensive.
Some types of leases could stick you with high financing charges, or worse, leave you on the hook for costly repairs or maintenance.
If you’re set on leasing a car with bad credit, there are important things to consider.
- What credit scores do I need to lease a car?
- What to consider when leasing a car with bad credit
- Ways to improve your lease approval chances before applying
- Alternatives to leasing a car with bad credit
What credit scores do I need to lease a car?
Much like auto loans, leases are typically subject to credit approval. When you apply for a lease, a car dealership or leasing company will usually consider your credit history and other factors, including your credit scores.
The average credit scores for those who got a lease at the in the second quarter of 2020 were 729, compared to 718 for new car financing and 657 for used car financing, according to the Experian State of the Automotive Finance Market report.
One reason for this difference could be the increased risk that a leasing company takes on when it leases a car to you. When you lease, you’re paying for the car’s expected depreciation during the lease term, along with a rent charge, taxes and fees.
The leasing company takes on the risk of depreciation — the car may lose its value faster than anticipated because of factors such as extra miles, excessive wear and tear, or damage. On the flip side, when you own a car, you take on the financial risk of depreciation.
What to consider when leasing a car with bad credit
As you shop for a lease, here are few things to keep in mind.
High cost of financing
With a lease, what is essentially your annual percentage rate may be called the “money factor,” “lease factor” or “lease rate.” Unlike the annual percentage rate you see with a car loan, the money factor is expressed as a decimal fraction. It’s used to determine your rent charge, which is your cost of financing.
Though it’s just one of the factors considered in the application process, low credit scores can mean higher finance charges. This means that if you’re able to get approved for a lease with bad credit, you may be looking at a higher money factor.
“Lease-here, pay-here” dealerships
Even if you’ve been rejected by other leasing companies, you might find yourself considering leasing a used vehicle from a “lease-here, pay-here” dealership. This can be tempting, especially if you need a car quickly — but buyer beware.
These dealerships may offer leases on older used cars. They often require that you make weekly or biweekly lease payments and pay high rent charges, and they commonly don’t offer coverage for repairs or maintenance.
Consider these dealerships only if you’ve exhausted all other options and you can’t wait to get a car until you can work on improving your credit. If you decide to apply for a lease from a lease-here, pay-here dealership, make sure you understand all the lease terms and charges.
Ways to improve your lease approval chances before applying
Here are a few ways you may be able to approve your chances of getting approved before applying.
Make a down payment
Putting down money when you sign for a lease — known as capitalized-cost reduction or cap-cost reduction — can help. Aim to save money to make a larger down payment before you apply for a lease. Doing this will lower the amount of your lease and your monthly payments and just might increase your chances of being approved. But keep in mind that many leasing companies have restrictions on the total cap-cost reduction you can make.
Lower your debt-to-income ratio
Your debt-to-income ratio, or DTI, is a simple calculation that equals your monthly debt payments divided by your monthly gross income. Lenders generally view a lower debt-to-income ratio positively. But remember: Your DTI may be only one of many factors that a lender considers when determining if you’ll be able to make your monthly payments.
Get a co-signer
Consider asking someone with stronger credit like a family member or friend to co-sign your lease. Having a co-signer can help provide reassurance to the leasing company that payments will be made on time. But remember that your co-signer is on the hook if you fail to pay, so make sure whoever you ask is fully aware of their responsibility.
Alternatives to leasing a car with bad credit
If you’ve already been turned down for a lease or aren’t sure whether a lease is the best option for you, here are some possible alternatives.
Take over someone else’s lease
If you are approved to take over someone else’s lease — known as a “lease swap” or “lease transfer” — you’re responsible for the remaining payments and fulfilling the original lease terms. Sites like SwapALease.com or LeaseTrader.com can help you identify lease-transfer opportunities. Take note though: You’ll likely need to have similar credit to the original lease owner to qualify.
Buy a less expensive used car
Buying a lower-priced used car typically means you have less to finance, which could lower the amount of interest you pay. And though it depends on several factors, qualifying for a used-car auto loan may be a bit easier with bad credit than leasing a car.
Find a dealership with a special financing department
If you want to buy a newer car, consider a car dealership with a special department focused on considering people with less-than-stellar credit. Keep in mind that even if you are approved, these loans will likely have higher interest rates if you have a lower credit score.
If you have bad credit, it can be difficult to get approved for a lease. And if you are approved, leasing can end up being expensive, with considerable cash due upfront and high financing charges.
If you can wait, consider focusing on rebuilding your credit before you begin lease shopping.