A lease-to-own (or rent-to-own) program allows borrowers to make installment payments on a vehicle over a period of time determined in the lease. Once all the car payments have been made, the borrower (the lessee) assumes ownership of the vehicle. These arrangements can particularly benefit borrowers who have bad credit and don’t qualify for traditional leases or car loans. That said, these agreements tend to be expensive, so it’s important to understand the terms of the lease-to-own contract before you enter into one.
If you don’t have good enough credit to buy a car, you may be interested in leasing. While a lease-to-own car may not be your first choice when buying a car, it may be helpful if you have a poor credit history and can't easily find a lender who will approve you for a conventional car loan.
What Is a Lease-to-Own Car Program?
A lease-to-own (or rent-to-own) program allows buyers to make installment payments on a car over the term of the lease. Once you make all the car payments due under your lease, you assume ownership of the vehicle. The dealer holds title to the car in a lease-to-own agreement while you, the lessee, make your payments.
Lease-to-own contracts may be easier to get approved for than a conventional car loan if you have bad credit. If you find yourself in this situation, you may discover that you only qualify for expensive subprime loans with high interest rates. If so, your monthly payment may be too high.
Companies that offer rent-to-own agreements often target borrowers with bad credit. These lenders don’t require a credit check for approval. So even if you have a low credit score or negative entries on your credit report, you can still get approved. You may only be required to provide proof of identity, residency or citizenship, and a regular source of income.
Some dealerships may also require proof of insurance. This isn’t the case with traditional car financing or leasing. These lenders usually run a credit check as part of the approval process.
How Does a Lease-to-Own Agreement for a Car Work?
If you have a lease-to-own contract, you’ll make regular payments just like someone who’s traditionally financed their car with a car loan. But unlike someone with traditional financing, if you have a lease-to-own agreement, you’ll typically be required to make weekly or bi-weekly payments instead of monthly payments.
Some leasing companies may also require a down payment at the beginning of your lease term.
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Lease-to-Own vs. Leased Cars: What’s the Difference?
A lease-to-own agreement is different from a traditional auto lease. In a traditional lease agreement, you rent the car for a defined time period (36 months is the most common). After that, you return the vehicle to the dealership or leasing company and you have no ownership interest in the vehicle.
One of the main differences between a traditional lease and a lease-to-own agreement is the type of dealership that offers the lease.
Traditional leases are typically used for new vehicles and are offered by franchised dealers whose parent corporations often have their own financing companies. Buyers and lessors may use these companies or a third-party lender to finance the deal.
Lease-to-own cars are offered by dealerships with in-house financing where the dealer is also the lender for the financing. Unlike the vehicles in traditional leasing agreements, lease-to-own vehicles are exclusively used cars.
How Does a Lease-To-Own Car Agreement Work?
Lease-to-own agreements are often used by dealers that only offer used vehicles for lease or sale. These dealerships and leasing companies are small, independent car lots as opposed to the national franchised dealers that offer new cars for sale and lease.
At the end of a lease-to-own rental agreement, you’re required to buy out the vehicle. Unlike a traditional auto lease, dealerships may allow customers to terminate a lease-to-own agreement. But if you do, you forfeit any down payment, all lease payments, and any credit toward the purchase of the vehicle at the end of the lease term.
Is a Lease-to-Own Car Program Worth It?
Choosing to rent-to-own a vehicle has its benefits and drawbacks. Whether or not the pros outweigh the cons depends on the situation. It’s always wise to explore all of your options for buying a new car.
Benefits of Lease-to-Own Cars
Lease-to-own cars certainly come with some advantages. Even without a good credit score, you’re likely to get approved for a lease-to-own agreement. You can enjoy the benefits of owning a car at a lower price than if you bought a new car.
You will, most likely, have lower monthly payments than if you had financed the vehicle for purchase. You also don’t have to repay any principal — only the depreciation of the vehicle and any finance charges.
Once the lease period ends, which will usually be 1-2 years as opposed to 2-4 years with a traditional lease, you become the owner of the vehicle.
Drawbacks of Lease-to-Own Cars
There are also disadvantages to lease-to-own cars, including:
They can be quite expensive.
They don't include a car warranty.
They usually require frequent payments — usually weekly or bi-weekly rather than monthly.
And because lease-to-own vehicles are used vehicles, they have more mileage than traditional leased cars. At the end of the lease, the car’s value may be less than your final buyout price when considering every monthly payment and all rental fees.
Lease-to-own vehicles also usually require some upfront costs like a down payment at the beginning of the lease and an additional signing fee at the end. You’ll forfeit this down payment if you terminate the contract early or don’t do a buyout at the end of the lease agreement.
Also, making timely payments on a rent-to-own lease won’t improve your credit score if the lease-to-own dealer doesn’t report to the credit reporting agencies. They aren’t required to report your payments.
Other Considerations for Lease-To-Own Cars
Not all dealers and leasing companies are the same. Shop for companies that offer lease deals that include a fair price and reasonable contract terms. It’s important to read and understand every term in the lease. Pay special attention to any early termination consequences and how much of each payment will be applied toward the eventual purchase price of the car.
Keep in mind that if you make even one late payment, the dealer can cancel your option to purchase, and you may also lose payment credit for any past lease payments.
How Does a Traditional Car Lease Work?
Traditional leasing is only available at franchised dealerships and is usually reserved for new vehicles. Typically, a traditional lease’s monthly payments are more affordable than financing a new car with an auto loan.
A traditional car lease requires you to pay the difference between the sale price and the value of the vehicle at the end of your lease term. This is known as the vehicle’s residual value. You have no equity in the leased vehicle for any future purchase.
Your lease may have termination fees, but sometimes the dealership or leasing company waives the fees if you lease another vehicle. There may also be rebates and an option to purchase the car at the end of the lease.
Leasing also allows you to forget about any fluctuations in the car's trade-in value or the hassle of selling it when the lease ends. You just drop off the car at the dealer and turn in the keys.
Lease contracts may specify mileage limits. If you exceed these limits, you’ll have to pay an excess mileage penalty from 10 cents to as much as 50 cents for every additional mile. If you don’t keep the vehicle in good condition, you’ll have to pay excess wear-and-tear charges at the end of the lease.
Alternative Ways To Buy a Car
If you can’t afford traditional financing to buy a car, don’t qualify to lease a vehicle, and don’t want to lease to own, you still have some purchase options. The first is to apply for a second-chance auto loan. The drawback is that these loans often have high-interest rates, but if you really need a vehicle, they can help you get a car.
Another option is to ask a family member or friend who has good credit to co-sign the loan. Having a co-signer can help you get a loan with a better interest rate than a subprime loan. Finally, you can shop for a used car from a private seller if you have the cash on hand.