What Credit Score 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 end of 2018 were 724, compared to 715 for new car financing and 659 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.” Source: creditkarma.com
Leasing a Car with bad Credit – What to Consider
As you shop for a lease, here are few things to keep in mind.
- Higher cost of financing – Though it’s just one of the factors considered in the application process, sub-par 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. 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.
- 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. (Source: creditkarma)
Ways to improve your lease approval chances
There 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. Source: creditkarma.com
How Does Leasing a Car Work?
Let’s take a look at how leasing a car works.
What is a Lease?
When you lease a car, you don’t buy it. Instead, you essentially rent the car for a predetermined period of time. The length of time is usually between two and four years. First, you must make a down payment with your dealer to secure the car. Then, you make monthly payments on your lease. You’re responsible for covering the cost of car insurance and maintenance. Leases allow you to drive a new car without paying the full price for the vehicle. Leases essentially allow you to “test drive” a car for a long period of time.
You may have the option to buy the car at the end of your lease. However, many leases stipulate that you must hand the car back to the dealer as soon as your lease is up. Leasing might be right for you if you don’t hold onto cars for long. You’re usually better off buying a used car than leasing if you have a long-term need for a reliable vehicle. Make sure that leasing is right for you before you choose a lease.
How Much Can You Spend each Month?
Decide how much you can afford to spend each month. This can help you to be sure that you want to lease a car. Lease payments are usually less than the equivalent monthly payments to buy the same car new. Often times, you may be able to afford a nicer model if you lease. But, decide first how much you can realistically spend each month on lease payments. Remember that when you lease, you often must give the car back at the end of your term. It’s a good idea to try and save a little money each month throughout the duration of your lease. Then, you are in a better position to buy a car when your lease is up.
You’ll also need to think about monthly insurance costs, especially if you’ve never owned a car before. Car insurance is a legal requirement to drive a vehicle. You must maintain a current insurance policy to stay on the road. Also, it is almost certainly a requirement in your lease agreement. Monthly car insurance premiums can vary depending on where you live. Other factors that affect premiums are what you drive, your credit score and even your gender. Request a quote from a few insurance companies in your area first. It’s a good idea to see what you can expect to pay before you get a lease. If you do decide to lease, be sure to sign an insurance policy before you get behind the wheel. A gap in coverage can leave you legally liable.
Find the Right Car
Visit dealerships and browse vehicles available for lease once you’ve set your budget. Most dealerships sell cars after they lease them. You can expect that the newest models will often be the only ones available for lease. Not every dealership offers leasing programs. Be sure to ask a salesperson or associate for assistance when you are at each dealership. Shopping foa a vehicle to lease is much the same as you would shop for a car to buy.
- Test Drive – Take the vehicle for a test drive
- Compare Features – consider the vehicle’s fuel efficiency and safety features
- Think Long Term – pick a car that you think you’ll be comfortable in for a few years.
- Shop Around – Don’t be afraid to shop around at more than one dealership before you choose a car.
Negotiate Your Best Deal
Negotiate your terms with the dealership when you find the vehicle that’s right for you. Don’t be afraid to haggle all the details. You can discuss everything from your monthly lease payments to any additional fees the dealer charges. Ask about fee reductions or waivers. You may want to shop at multiple dealers until you find a deal that works for you. You’ll be surprised to find you get better at negotiating the more you practice.
Your dealer might ask you to submit some financial paperwork. It is reasonable to expect them to view your credit report, your last bank statement or verify your employment history. Dealers ask for this information because they need to be sure that you’re able to cover your lease payments for the entire term. Your dealer may change the terms of your offer or cancel it altogether if you have bad credit or no credit.
Knowing your score before you shop for a lease can help you avoid unpleasant surprises. Many drivers wait to apply for their lease until they bring their score into FICO’s “good” range — between 670 to 739 points. You might have a more difficult time finding a dealer willing to work with you if you have a score lower than this.
Read the Fine Print Before you Sign
Your dealership will draw up a contract for you when you reach an agreement on car and price. Carefully read over the contract and make sure that the terms in the lease match the terms you verbally agreed to. Pay close attention to the lease term, which is how long you’ll have the car. Review your monthly payment, your down payment, any fees and your interest rate. Make sure it includes a “buyout price” if you’d like to be able to buy the car at the end of the lease.
Don’t sign the contract if something on the contract doesn’t match your original agreement. Even if the dealer says he or she will fix it, don’t sign until you see it corrected in writing. Consider it a major red flag if the dealer pressures you to sign a contract that’s wrong or incomplete.
Pay your dealer the agreed-upon down payment if your contract looks correct. You will also want to make sure that your car insurance is current or you have a gap policy in place before you sign. From there, your dealer will explain how you can make your monthly payments and you can drive off in your new car. (Source: moneylion.com)
Why it’s Hard to Lease a Car with Bad Credit
It can be difficult to get approved to lease a car with poor credit. From the dealer’s perspective, leasing a car is not a lot different than selling a car outright. A dealer or lender is going to use your credit score to evaluate your application. They’re likely to determine your creditworthiness based on your credit score. The lower your score, the higher their risk that you won’t make your payments. This is why a low credit score may lead them to turn you down for a lease. If you have bad credit, it may not be in your best interest to lease a vehicle. If you have bad credit, here are few things that you should consider:
- Higher finance charges – If you have bad credit, you’re going to face higher financing charges. In leasing, you’re charged interest via a money factor, which works similarly to an interest rate on a loan. Bad credit borrowers usually qualify for higher money factors, which increases the cost of the lease. Plus, you have to consider that a security deposit and higher down payment may be requiredrequired.
- You are locked in with a lease – Leases are riskier for borrowers with bad credit. What you owe is always going to be more than what the car is worth. This puts you perpetually upside down until the last day of the lease. As a result, getting out of a lease early is more difficult.
- It’s easier to qualify for an auto loan – Generally speaking, it’s easier to qualify for a car loan with bad credit than it is a lease. Also, you can use an auto loan to improve your credit score. This will put your in a better position to lease in the future.
Should you even Bother to Lease a Car with Bad Credit?
It’s not impossible to lease a car if you have a bad credit score. However, it will be much more difficult for you to find funding and a good lease with a lower score. Dealerships need to limit who they lease to in order to limit their risk of financial loss. With bad credit, you may still be able to get a lease. But, you’ll pay a higher down payment and monthly rate than if your score is higher.
As a general rule, dealerships look for lessees with credit scores in the “good” range or above for the best deals. You have a good credit score if your FICO credit score is 670 or above. You’ll want to take some time to improve your score before you look for a lease if your score is below that. Even if your score is already in the good range, pumping up your numbers can give you access to lower down payments and interest rates.
According to data from credit reporting agencies, the average credit score for lease applicants is 724. Almost anyone can benefit from improving their score before they apply. (Source: moneylion.com)
Other Factors can Help you Lease a Car With Bad Credit
There are other factors that dealers consider when deciding who qualifies for a lease. While your credit score is important, it is not the only factor that can influence the decision
Income is Key
One of the most important factors in getting approved for any type of lease is your credit. But, your income can be a great equalizer. As a matter of fact, a sufficient income and stable job history can do wonders to combat bad credit. However, it’s not enough to simply state you make a certain amount of money — you have to prove it. And, depending on the source of your income, you may be required to have one or more types of income verification:
- Paycheck stubs, earnings statements, W-2 forms, or tax returns may be required for salaries and wages.
- Form 1040/1040A or a notarized statement may be acceptable for tips, gratuities, and self-employment earnings.
- Individual contractors can use Form 1099 to show earnings.
- Unemployment, Social Security, or other types of income maintenance will require an award letter or uncashed check from the issuing agency.
- Child Support and alimony payments can be proven with court payment records, a copy of the divorce decree, or a copy of an uncashed check.
- Interest and dividend payments can be proven with an income tax return, dividend statement, or signed verification from your financial institution.
Every lessor will have different requirements as far as income verification. The leasing agent may also want to verify the balance of your savings or checking account. This will help them get general idea of the funds available on a monthly basis.
Have you Previously Leased a Vehicle?
If you’ve previously leased a vehicle with excellent payment history, it can help tip the decision in your favor. Being able to prove you have successfully leased a vehicle in the past can helping you qualify again. Especially if you have established a relationship with the dealer that qualified you for your prior lease. Most lessors will view your previous lease payment history in a favorable light. If you didn’t have any problems paying the previous lease, you are more likely to pay this lease as well. This can be the case, even though your overall payment history may not be perfect, or your credit score has dipped.
If this is your first time leasing a vehicle, your rent payment may be the only type of lease you’ve ever had. Unfortunately, the majority of apartments and rental leases will not show up on your credit report or boost your score. But, if that is all you have to bargain with, ask the lessor if they’re willing to accept a statement from your landlord as a testament to your payment history. A statement like this can actually help your chances of being approved for a lease. Each lender will have different leasing approval criteria, but it never hurts to ask.
Increase Your Credit Score Before You Lease a Car
Improving your credit score can make getting a lease simpler and less expensive. The benefits include lower down payment requirements and more manageable monthly payments. Having a higher credit score can save money and give you access to a wider selection of vehicle models. You should know your score before you apply for a lease and create a plan to improve your numbers if they’re low. There are steps you can take to improve you credit score. You should prepare before you head to the dealership with a credit-building face-lift.
Ways to Improve a Bad Credit Score
- Monitor your credit – It helps to know where you stand. A credit monitoring service can help you prevent identity theft by alerting you to new items on your report. This can help you stop any damage from fraud before it can do serious damage to your score. Sign up with a credit monitoring service before you start working on your score to track your progress.
- Consider a Credit Builder Loan A credit builder loan is a small, low-interest personal loan that helps you improve your credit score. There are different types, but the result is that you pay your loan back in monthly installments with interest. Your loan provider reports your on-time payments to the major credit reporting bureaus. This activity raises your score over time. Credit builder loans are a great way to prove that you’re able to manage on-time payment. It can also add a little diversity to your credit portfolio. Consider taking out a small, manageable loan and paying it back before you apply for a lease.
- Always Make Your Payments On Time – One of the most important factors determining your credit score is your payment history. Making your credit card, loan and other payments on time is the single biggest way to help raise your score. Review your minimum payment due dates on all of your outstanding accounts and make sure you’re submitting your payments on time. You will see your score slowly rise as these timely payments are reported to the credit bureaus.
Alternatives to leasing a car with bad credit
Have you already been turned down for a lease? Or, maybe you aren’t sure whether a lease is the best option for you? Here are some possible alternatives.
- Take over an existing lease – You can be approved to take over someone else’s lease. This is known as a “lease swap” or “lease transfer”. You become 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. You will still need to be approved. However, the requirements can be much lower depending on how much time is left on the original lease.
- Choose a less expensive used car – Buying a lower-priced used car typically means you have less to finance. This can lower the amount of interest you pay. It depends on several factors. But, 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 – Consider a car dealership focused on people with poor to average credit. There are dealerships that target buyers with less than perfect credit. The terms might be more expensive, but you have a better chance of walking away with a newly leased vehicle. If you are approved, these loans will likely have higher interest rates if you have a lower credit score.
Leasing a Car With Bad Credit – Final Words
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. Invariably, you will face considerable cash due upfront and high financing charges. If you can wait, consider focusing on rebuilding your credit before you begin lease shopping. Also, take these steps to prepare
Know Your Credit Rating – Credit scores start at 300 and go up to 850. Anything below 620 is designated as a “subprime score”. On average, the minimum credit score needed for leasing a car is 700. A credit score is a summary of your standing and ability to borrow money and successfully pay it back. Your credit history is a snap-shot of your past performance and likely future risk profile. Lenders look at your credit report as a summary of your payment history and reliability going forward. Each time you take out new credit, it can negatively affect this score. Lenders want to be sure you are not over your head and can meet all your current debt obligations.
Understand What to Expect
If you have low credit, you probably won’t be bringing home your dream car. However, with poor credit, cheaper vehicles should be easier to get qualified for. Some leasing agents specifically only handle weak credit applicants. Indubitably, there are car lots that work with all states of credit scores.
Target a Vehicle that Dealerships May Be More Eager to Lease – If you are struggling to find somewhere to lease a car or truck with bad credit, broaden your search. Car and truck manufacturers generally release new models at the end of each year. In turn, dealerships will probably not want outdated models occupying valuable space on their lots. Rather than continue to lose money, they are likely keen to unload and willing to deal. This can be a golden opportunity for those with a poor credit score.
Show a Steady Income
No one can expect to qualify for a lease without an income. And, a great income can convince a dealer to overlook a few dings on your credit report. Arrive at the dealership or leasing agent with actual proof of your steady income. You can bring copies of pay stubs and evidence of an income that is more than sufficient to take care of your monthly debts. Show that you are working to improve your weak credit score, and even include professional and personal references. Also, show evidence of prior leases you’ve had with a spotless payment history.
Save Up for a Bigger Down-Payment – Down-payments can be a strong factor for leasing agents when they consider your qualifications. On average, those with excellent credit will qualify for a nearly no money down vehicle lease. For those with less than perfect credit, however, the option for handing over a large down-payment can greatly increase your chances of a reasonable car or truck lease.