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The Pitfalls of Leasing a Car When You Have Bad Credit

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In a Nutshell

If you need a car but you don’t want to purchase one outright, leasing may be an attractive option. It gives you flexibility and package options without the maintenance hassle of car ownership. But if you have bad credit, it may be difficult to get approved for a car lease. And if you are approved, it may be more expensive. This article outlines how your credit score plays into the car leasing process, how to increase your chances of being approved for a lease, and other options you have besides leasing.

Written by Attorney Eric Hansen
Updated December 9, 2021

If you need a car but you don’t want to purchase one outright, leasing may be an attractive option. It gives you flexibility and package options without the maintenance hassle of car ownership. But if you have bad credit, it may be difficult to get approved for a car lease. And if you are approved, it may be more expensive.

This article outlines how your credit score plays into the car leasing process, how to increase your chances of being approved for a lease, and other options you have besides leasing.

Why Your Credit Score Matters When Leasing

Leasing a vehicle instead of buying one can help you avoid some of the headaches of car ownership. When you lease a vehicle, you may have lower monthly payments, lower upfront costs like a down payment, and little or no repair and maintenance costs. You also won’t have to worry about the trade-in value of your car. That said, whether you’re leasing or buying, the lender will want to run a credit check. Your credit score and credit history will determine your loan or lease terms. Even if you have bad credit, you can lease or buy a new or used vehicle. But you should expect to pay more.

There are several different credit scoring formulas, so you actually have more than one credit score. Many car dealerships use a FICO auto credit score that is specifically designed for auto loans and leases. Most car dealers and auto lease companies will require a high credit score to lease a vehicle than they do to finance an auto loan for buying a car.

Leasing companies prefer to lease to applicants with higher credit scores because it reduces their financial risk. In an ordinary car purchase, the owner bears the risk of depreciation. In a vehicle lease, the company leasing you the vehicle (the lessor) takes on this risk of depreciation. The lessee ends up paying for the vehicle’s expected depreciation, a rent charge, taxes, and fees. But it can be difficult to calculate the expected depreciation since it depends on many factors. 

The car could depreciate faster and its value could drop more significantly than the lessor was prepared for or accounted for. When this happens, it cuts into their profits. They’re also trusting you to take care of the vehicle, not drive it excessively, and not get into accidents. Vehicles with excessive wear and tear, damage, and high mileage are costly to auto lease companies. They may charge more to mitigate these risks.

In auto leases, the money factor (also known as the lease factor or lease rate) is used to determine your rent charge. Your rent charge is your cost of financing, sort of similar to an auto loan’s APR or interest rate. A lower credit score generally equals a higher money factor and subsequently higher lease payments and total overall cost. Good credit or excellent credit means a lower money factor and lower monthly car payments.

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Alternatives to Leasing if You Have Poor Credit

When you’re going to an ice cream shop, you might want a decked-out sundae, but if you only have a few bucks, you may only be able to get one scoop of a tasty flavor without any fun toppings. Similarly, with a low credit score, you might not be able to get the car lease you want, but you still have options. You could buy a cheaper used car or try the following:

Try a Lease Transfer 

You could take over someone else’s lease. A lease transfer allows you to essentially assume someone else’s lease. There are lease transfer services and companies that connect current leaseholders with people who want to step into their shoes and take over an existing lease. The catch is you’ll usually have to have similar credit to the leaseholder for the transfer to be approved.

Work With the Special Financing Department at a Dealership

Some car dealerships have special finance departments that routinely work with people with bad credit. They often work with subprime lenders and less picky financing companies. They may be able to find a reasonable car loan or auto lease for you with manageable monthly payments within your budget.

Try Using a Car-Sharing Service

If you only need a car occasionally, consider using car rental options like Zipcar or HOURCAR. These services allow you to use a car for a short time, then return it once you’re done. This way, you don’t have to make monthly lease payments. You just pay as you go.

Get a Car at a Lease Here, Pay Here Dealer

There are lease here, pay here dealerships that offer leases on older used cars and pre-owned vehicles to people with bad credit. If you go this route, expect to pay a high rent charge. Also, you may have to make biweekly or weekly payments instead of a monthly payment. They typically don’t offer maintenance or repair services like a traditional leasing outfit. Just as a buy here, pay here car dealer is a last resort when you’re buying a car, a lease here, pay here car dealer is also a last resort when you’re looking to lease a vehicle. It’s best to try other things first.

How To Increase Your Chances of Being Approved for a Car Lease

If you’re set on leasing a car and believe it’s your best option, there are steps you can take to increase your likelihood of getting approved for an auto lease. They include:

Make a Down Payment

Like when you’re buying a car, making a down payment when you lease can be an effective way to help you get approved for a car lease. If you can afford it, try to save up for a while. Making a down payment will lower your total lease amount and your monthly payments. This is why making one can increase your chances of approval. That said, not that some leasing companies restrict how much you can put down.

Use a Co-signer

A co-signer gives a leasing company some peace of mind. It increases your chances of getting approved because you have someone with good credit backing you up and promising to take on the responsibility to make payments if you don’t. Because the co-signer will be on the hook to pay if you default, make sure you’ll be able to make those payments.

Lower Your Debt-to-Income Ratio

Along with your credit score, your debt-to-income ratio (DTI) is an important factor in your auto lease application. DTI is calculated by adding up all your monthly debts (rent/mortgage, minimum loan payments, minimum credit card payments, support payments, etc.), then dividing by your gross monthly income. To get a lease, most lessors will want to see a DTI between 25% and 35%. If you’re able to pay off or pay down a loan or credit card, you can lower your DTI. You can also lower your DTI by increasing your income, for example, with a side gig. Lowering your DTI is helpful, but it’s not the only factor considered during the application process. 

Improve Your Credit Score

Improving your credit score is a tried and true strategy to increase your odds of a lease or loan approval leasing and to get better lease terms. You can improve your credit score by:

  • Making on-time monthly payments and having a good payment history.

  • Decreasing your credit utilization ratio.

  • Paying your credit cards in full each month.

  • Developing and maintaining long-standing relationships with creditors.

  • Disputing errors on your credit report and having those items removed.

Let’s Summarize...

If you have bad credit, that doesn’t mean you can’t purchase a car or lease a vehicle. It may be more difficult to get approved for the lease though. And you should expect to pay more. You can increase your odds of getting approved with decent terms by getting someone to co-sign for you, making a higher down payment, lowering your debt-to-income ratio, or improving your credit score. Also, remember you have options like doing a lease transfer, working with a special finance department, or using a car-sharing service instead of leasing.

Written By:

Attorney Eric Hansen

Eric D. Hansen is an experienced Minnesota attorney within a number of varying and nuanced practice areas. He has operated his own solo practice as well as worked at small suburban boutique firms and large diversified downtown law firms. Eric has a wealth of experience in busines... read more about Attorney Eric Hansen

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