A lease-to-own or rent-to-own program allows a borrower to make installment payments on a vehicle over the term of the lease. Once all the payments have been made (per the terms of the lease), the borrower assumes ownership of the vehicle. The dealer holds title to the car or truck in a lease-to-own agreement while the borrower (lessee) continues to make payments. These arrangements can particularly benefit borrowers who have bad credit, as these borrowers may not qualify for traditional leases. As these agreements tend to be expensive, it is important to understand the terms of any such contract before entering into one.
If you don’t have good enough credit to buy a car, you may be interested in leasing. This article will explore the benefits and drawbacks of leasing a car. While a lease-to-own car shouldn’t 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 new car loan.
What Is a Lease-to-Own 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 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 better than getting a conventional car loan for borrowers with 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 this is the case, your monthly payment may be too high.
Leasing companies that offer rent-to-own agreements 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 be approved. You may only be required to provide proof of identity, proof of residency and 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 a Lease-to-Own Agreement Works
If you have a lease-to-own contract, you’ll make installment payments, just like someone who’s traditionally financed their car with a loan. Unlike someone with traditional financing, if you have a lease-to-own agreement, though, you’ll typically be required to make weekly or bi-weekly installments payments instead of monthly payments. This is common for both traditional leasing and financing contracts. 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
A lease-to-own agreement is different from a simple auto lease where the car is rented for some defined time frame and then returned to the dealership or leasing company. At the end of a traditional lease, you return the car since 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 dealership that offers the lease. Traditional leases are typically used for new vehicles and are offered by franchised dealers whose parent corporations likely 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 any financing arrangement. Unlike the vehicles in traditional leasing agreements, lease-to-own vehicles are exclusively used cars.
A Traditional Lease
Traditional leasing is only available at franchised dealerships and is almost exclusively used with new vehicles. Typically, a traditional lease’s monthly payments are more affordable than financing a new car with an auto loan. If you want to drive a brand-new vehicle every few years, leasing may be the perfect solution. That said, new car leasing is generally only available to borrowers with good credit. A leasing company will run a credit check for a traditional lease. If your credit score is rated less than “good” on the FICO scale, your application may be denied.
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. Winding up a traditional lease is easy. You simply turn in the keys and walk away. You have no ownership rights in the vehicle. Your name is not listed on the car’s title. 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.
Advantages and Disadvantages of Leasing
One advantage of a lease is that you‘re driving a late-model vehicle with the latest safety features during a vehicle’s most trouble-free years. It’s also likely covered by the manufacturer's standard new car warranty and may include free scheduled maintenance services. 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.
A disadvantage of leasing is that its total cost is more than a car loan. This is because you’re paying to use the car when it’s depreciating most rapidly. If you choose to lease one car after another, you’ll always have a monthly car payment. By contrast, the longer you keep a vehicle after paying off a car loan, the more value you receive.
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.
If you decide that you don’t like the car or if you can’t afford the lease payments, early termination fees and penalties will become due at the same time. These charges could equal the amount of the lease for its entire term.
A Rent-to-Own Lease
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. A highly competitive market makes these lease-to-own companies hungry for customers. As a result, they don’t check a borrower’s credit score as part of the approval process. This makes a lease-to-own car an appealing alternative for borrowers who are struggling to get financing from traditional lenders to buy a new car.
If you have bad credit, buying a vehicle through a rent-to-own agreement may be less expensive than financing or leasing a new vehicle. Leasing companies don’t run credit checks to approve customers for lease-to-own programs. The drawbacks are that the car is used, probably overpriced, and not covered by any warranties.
Also, a lease-to-own dealer may not report to the credit reporting agencies. If they don’t, making timely payments on the lease won’t improve your credit score. When shopping for a lease-to-own vehicle, it’s wise to ask the dealer in advance if they report payments to the major credit bureaus. With a traditional lease, your payment history is reported to the credit bureaus.
At the end of a lease-to-own rental agreement, you’re required to buy out the vehicle. Like a traditional auto lease, your name isn’t listed on the title for the rent-to-own vehicle while you make payments. Unlike a traditional 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.
On the surface, leasing a car may seem more appealing than buying a car. The monthly cost of having a car is lower since your monthly payments are less than if you had financed the vehicle for purchase. You’re repaying the difference between the car’s value when it was new and the car’s residual or existing value. You don’t have to repay any principal — only the depreciation of the vehicle and any finance charges.
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 credit for any past lease payments.
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
There’s no denying that lease-to-own cars come with some advantages. Even with a low 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. 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. They're expensive, don't include a car warranty, and require more frequent payments. Having weekly or bi-weekly payments may make a payment plan harder to manage. 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.
Unlike the deluxe service programs offered by a traditional lease, lease-to-own contracts require you to pay for all maintenance and repairs. The lessor of the car may offer a warranty for service but at an additional cost.
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 options. The first is to get a subprime loan. These loans often come with high-interest rates, getting one can help you get a vehicle if you really need one.
Another option is using a family member or friend as a co-signer. 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.
Whether it’s a good idea to lease to own a car depends on your credit. If you have bad credit, it may be worthwhile. The alternative would be buying a more expensive vehicle at a higher interest rate, which can lead to an unaffordable monthly payment. Typically, lease-to-own vehicles are used cars, but doing a lease-to-own agreement will get you a set of wheels and allow you to enjoy the benefits of car ownership at the end of the lease. Just be sure you understand the terms of the agreement and don’t miss any payments.