If you need a new car, you may consider leasing one rather than making an outright purchase. It can mean lower monthly payments and lower down payments compared to buying.
However, when leasing a car with bad credit, you might face some obstacles, like higher interest rates. Luckily, there are ways to get around them so that you can successfully lease a car that fits your needs.
What to Consider Before Leasing a Car With Bad Credit
We’ll show you ways you can improve your credit below, but there are some things you should consider before you lease a car with bad credit.
Car Lease Security Deposit
Down payments for a leased car are usually paid in the form of a security deposit. For most people, it equals one month’s payment that’s rounded up to the nearest $50, and the money is refunded at the end of your lease term. However, if you have bad credit, your security deposit will most likely be higher.
Another down payment option if you have poor credit, but extra savings is a one-pay lease. This is another way to save money on interest over time, but it requires paying your entire lease in a single lump sum.
This may be a smart move depending on how much you could save versus how much you could earn by putting the money into another investment. But if you’re facing a higher interest rate due to bad or limited credit, the one-pay lease option might make sense if you can afford it.
Annual Percentage Rates
Your lease offer may come with a high annual percentage rate (APR), known as the “money factor” or “lease factor.” This could raise your monthly lease payment and make leasing a vehicle too expensive for you.
Keep in mind that standard auto leases come with annual mileage limits. Most leases come with 12,000-mile annual limits. If you go over the allotted miles, you’ll have to pay a per-mile fee when you turn the car in.
What credit score do you need to lease a car?
When applying for a car lease, you’ll almost always have your credit checked as part of the process. The worse your credit score is, the less favorable the terms of your lease will be. On top of that, you may be required to pay a larger down payment with a low credit score.
What’s the minimum credit score needed to lease a vehicle?
The minimum credit score needed to lease a vehicle will vary depending on the leasing company and the specific terms of the lease. However, it’s likely that you will need a credit score of at least 620 or higher to qualify for a lease.
Leasing companies generally consider credit scores of 620 or higher to be “fair” credit. Individuals with fair credit may be able to qualify for a lease with somewhat higher interest rates and fees compared to those with excellent credit.
Anything under 600 is classified as “subprime.” You may have to put down a deposit for the car if you’re in this category. So again, in this case, it may not be prohibitive to qualify for an auto lease, but it may be cost-prohibitive depending on your financial situation.
It’s important to note that credit scores are just one factor that lenders consider when evaluating lease applications. Other factors may include your income, employment history, and debt-to-income ratio. Lenders may also consider the type of vehicle you are leasing and the length of the lease term.
Shop around at several dealerships and leasing companies to figure out what you can expect to pay monthly and upfront with your current credit score. That can help inform you what kind of car you should look for.
How does leasing a car affect my credit score?
Leasing can impact your credit scores in a few different ways. Like any other type of financing product, your payment history can seriously affect your credit scores over time.
As you make on-time lease payments over an extended period, you can see significant growth in your credit score. But if you miss monthly lease payments, your credit scores will suffer just as if you missed a credit card or car loan payment.
Your credit score also considers the amount of money you owe, and a lease is included in that amount. However, it’s considered an installment loan with a fixed repayment period. This is favored more than revolving credit like a credit card or line of credit.
Does leasing a car build credit history?
As you continue to pay down your lease amount, your credit scores will improve because you’ll owe less overall. Thus, leasing can help rebuild your credit over time. However, you may notice a slight dip in your credit scores when you first take out the lease.
Why do your credit scores temporarily decrease when you first lease your car?
There are two reasons. The first is that the lender will perform a credit inquiry as part of your lease application. That shows up on your credit report and causes a slight dip for a year.
The second reason is that opening any new account lowers the overall age of your credit accounts. Again, this impact goes away over time but does explain any short-term decreases you see in your credit scores.
How to Improve Your Lease Approval Chances
Improving your credit rating as much as possible is one of the best things you can take the time to do. Start by checking your credit score to see what range you’re in. Then access your credit reports to see what areas you should focus on.
Lower Your Debt-to-Income Ratio
If your debt is high, try to pay it down as much as possible. This will help lower your debt-to-income ratio and show lenders that you can make the monthly payment.
Clean Up Your Credit Report
If you have many late payments listed on your credit report, you may consider disputing any inaccurate or incomplete information. Removing negative items from your credit report is one of the quickest ways to increase your credit score.
Make a Down Payment
Another option to improve your chances of leasing a vehicle is to save up more cash for a deposit. While some leases may only have an optional deposit, you’ll likely be required to put extra cash down if you have a poor credit score.
The more you put down, the lower your monthly payments will be. So start setting aside extra cash so you can put more skin in the game and be considered for leasing a vehicle.
Get a Cosigner
A cosigner is someone who agrees to be responsible for a loan or other debt if the primary borrower is unable to make payments. Cosigners are often used to help individuals with poor credit or a limited credit history qualify for loans or other credit products that they might not otherwise be able to get.
If you are considering a lease and are having trouble getting approved on your own, you may want to consider getting a cosigner. A cosigner with a good credit score can help you get approved for a lease and may also help you get a lower interest rate and more favorable terms.
Do a Lease Swap
A final way to qualify for a lease, even with low credit scores, is to apply for a lease transfer. A lease swap, or lease transfer, involves someone who is currently leasing a vehicle transferring the remainder of their lease to someone else.
You can use a third-party service to get paired with someone who wants to get out of an existing lease. Typically, you can avoid paying a deposit, and the credit requirements usually aren’t as strict as when working directly with a lender.
The credit requirements for a lease transfers are typically less strict than when applying for a new lease directly with a lender. This is because you are not taking on a new loan; you are simply assuming the remaining payments on an existing lease. However, you may still need to meet certain credit and income requirements. You may also need to pay a transfer fee to the leasing company.
Leasing a car with bad credit is possible, and there are even ways you can lessen your financial burden. As your current vehicle starts to age, start planning for your new lease as soon as possible. That means taking steps to improve your credit and saving up as much cash as possible.