You’re thinking of leasing a car, but a few dings on your credit score have you worried that you may not qualify. That’s reasonable because credit scores affect all borrowing. The bottom line is while you may find a lender willing to work with you, be prepared to spend more than someone with stellar credit.
People choose leasing over buying a car for the lower out of pocket costs (think smaller down payments) and more manageable monthly payments. If you’re saddled with bad credit, and still want to lease a vehicle, expect higher out of pocket costs, higher interest charges and bigger monthly payments. Here’s what you should know:
You may need to make a larger down payment, make bigger monthly payments, and be hit with a higher “money factor” (see below).
You might try workarounds like leasing a pre-owned vehicle or taking over someone’s lease.
When you lease a car, you’re renting it for a certain amount of time with a set number of miles allotted. Leasing is less popular than buying: about a quarter of new cars were leased in 2020’s 4th quarter, according to Experian. When you seek to lease a car, the dealership will run a credit check to ensure you’re credit-worthy. Dealerships and lenders give the best deals to customers with the best credit score.
While there is no set credit score limit for leasing a car, “usually a score between 670-739 is required,” says Jacob Dayan, CEO, and co-founder of Community Tax and Finance Pal. “A credit score lower than 670 might be harder to secure a lease, however, if you do, the down payment and monthly rate will be much higher,” says Dayan.
When you buy a vehicle, you take on its depreciation: the car’s value falls as it ages. But when you lease a car, the lender takes on the car’s depreciation, accounting for this in the lease terms.
Now back to the term mentioned above: money factor. Unlike the annual percentage rate charged when you buy a vehicle, your lease factor, a.k.a. money factor or lease rate, is the rate you pay when you lease a vehicle, similar to the interest rate when you buy a car. Your lease terms are determined using this money factor, which is based on your credit rating, the price of the car, and the car’s so-called residual value. That’s the estimated value of the car at the end of the lease.
What you need to remember is the car’s price and the money factor are negotiable, while the residual value is pre-set. Credit scores over 729, the average lessee credit score in the Experian report, will qualify for the lowest money factor–the best rate–while scores below 700 will receive the highest money factors, or least-preferred rates.
The best deals on a lease include a low lease price, a high residual value, and a low money factor. Without the low money factor, you’ll likely pay a lot more than someone with a better credit rating.
A large down payment on a lease may help.
A trade-in vehicle might offset some up-front risks, making you slightly more appealing to the lender since you’ll be adding more money toward your lease.
Consider buying a less expensive model, rather than your first choice.
A parent or family member with good credit may help if they are willing to cosign the lease.
Companies like LeaseTrader may be able to match you with someone who needs to get out of their lease. Taking over another person’s lease still requires a credit check to qualify. Still, the terms and money factor may be more favorable and a large down payment may not be required.
Look for a dealership that leases pre-owned vehicles. A note of caution: While you might find savings on down payments, money factor, or monthly payments, be careful of “lease-here-pay-here” dealerships that focus on folks with bad credit. These deals typically are financed by the dealership rather than an outside lender, and come with a large down payment, unfavorable terms, and higher monthly or biweekly payments. You’ll also have less selection of newer models to choose from since they’re usually smaller, and you may be responsible for repairs. Read contracts carefully at any lease-here-pay-here places and consider them a last resort.
If you’ve been denied a lease, or offered a lease with a large down payment, high money factor and monthly payment, consider a few alternatives:
Buy a less expensive, pre-owned vehicle with cash or try to get more favorable terms financing a car rather than leasing one.
Work with a credit union or dealership that specializes in leases for people with less-than-stellar credit.
In the meantime, take immediate steps towards repairing your credit score. “Make on-time payments every month on all of your balances, and if you can’t afford to pay them off in full, pay as much over the minimums as you can afford,” says Nathan Grant, senior credit industry analyst at Credit Card Insider.
Also, avoid maxing out your credit cards and work towards trimming your debt-to-credit ratio. A good debt to credit ratio is 30% or less. If you have $7,000 of available credit, for instance, and you’re using $5,000, your debt to credit ratio (71%) is way too high, keeping your credit scores low.
You can lease a car with bad credit, but you may have to look hard for a good deal. You’ll likely have a larger down payment, bigger monthly payments, and may receive an unfavorable lease rate if you get approved. If you get a co-signer, take over someone’s lease or lease a used vehicle, you may save money.
Otherwise, wait until your credit is in better shape to get a more favorable leasing deal, or if you can’t wait, try buying an older model car rather than leasing a newer one.