Can You Lease a Car with Bad Credit?
Leasing is a popular financing arrangement that allows drivers to rent a vehicle without committing to a purchase. Although leasing provides a range of benefits, it won’t allow you to escape the effects of low credit scores. If your credit isn’t great, however, don’t worry.
You can take several steps to improve your credit score before leasing a new car. Many dealers also specialize in low-credit arrangements and alternatives to leasing. At Car and Driver, we’re here to give you all the info you need to lease a car, truck, or SUV, no matter your credit score. Keep reading to learn how to lease the car of your dreams.
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How Does the Car Leasing Process Work?
Leasing is an arrangement that allows customers to essentially “rent” a vehicle from a dealership. It’s less expensive than purchasing a car outright and allows customers to gain all the benefits of driving a new vehicle. The leasing process usually involves the following steps:
Planning
Before you lease a new vehicle, it’s important to make a plan and decide what you can pay. One of the main reasons to choose leasing over buying is the price, so it’s important to get this step right. Plan out how much you can afford as a monthly payment and then factor in the likely monthly cost of insurance.
To make your estimates more accurate, you can use one of many online car payment calculators. It might also be helpful to contact an insurance agent and get a quote based on your age, location, and driving history.
Browsing
Once you have a rough estimate of your budget, you can start shopping around for a vehicle. Before you go into a dealership, call and ask if they offer lease options. Not all do, and confirming this information can save you loads of time.
Once you find a dealership that offers leasing options, view the vehicles in person. Take a few test drives to make sure the vehicles meet your needs.
Financing
Once you find a car you like, you can start negotiating the price. If you have to apply for a car loan, the dealership will assess your credit score and debt-to-income ratio to ensure you can make your payments.
It’s important to remember you can negotiate the terms of your lease with the dealership. Make sure you talk to multiple dealerships so you can find your ideal monthly rate.
Another thing to consider is an eventual purchase. Many dealerships offer customers the option of buying the car at the end of the lease. If you want this option, make sure the dealership offers it. If your application clears, you can leave the dealership with your new lease.
Your representative will draw up a contract that describes the terms of the lease, including your monthly payment, down payment, interest rate, buyout fee (if applicable), and any associated fees. Review every part of the contract before signing to ensure it matches your agreed-upon terms.
Payments
The first payment you make will be the down payment, made on the day you sign the lease. Every month after, you must make the payment specified in your lease agreement. As mentioned, leasing generally allows you to make smaller payments than you would if buying a car outright.
Although these payments are lower, you must pay any costs associated with driving the vehicle, including insurance and trips to the mechanic. Make these payments on time to stay within the requirements of your lease.
End of Lease
Once your lease’s term expires, it’s time to return the car to the dealership. Make sure the vehicle is in excellent condition, as you’ll most likely have to cover any damages incurred while you’ve had the car in your possession.
If you arranged a buyout option when you signed the lease, you’ll have the option of purchasing the car at the agreed-upon price and enjoying your ride for many years to come.
What Credit Score Do You Need to Lease a Car?
You’ll need to undergo a credit check before you’re eligible to lease a vehicle. The minimum credit score required to be eligible for a loan will vary by dealer, but most look for a score of at least 661.
This is on the low end, and many dealers look for scores of 700 and above, according to Experian’s State of the Auto Finance Market Q2 2022. This report shows most lease customers have scores of 741 or above. This means most dealers look for higher credit scores when leasing than they might for purchases.
While these rules apply broadly, all dealerships approach leasing differently. It’s important to check with a variety of local auto sellers to find one that will agree to lease you a vehicle. Some might even specialize in helping customers with poor credit get car loans, although this can come with additional drawbacks.
What Should You Consider When Leasing a Car with Bad Credit?
If your credit score is subprime or just barely over the line, you’ll have to jump through a few extra hurdles to lease a car. The most common challenge you’ll face is higher prices. This might include a larger down payment, higher monthly payments, or increased financing charges.
Also called the money factor, these financing charges are similar to the interest paid on a loan and are based on credit scores. If you’re presented with increased costs, measure them against your monthly budget to ensure you can still make the payments reliably.
Another pitfall you might encounter is a “lease-here pay-here” dealership. These companies specialize in offering leasing options to customers with low credit scores. If you’ve had trouble finding a suitable leasing arrangement, these offers might seem tempting.
Unfortunately, they often come with fewer options and several drawbacks. In many cases, the cars available will be older and the rates higher. This might cause you to overpay for a car that isn’t worth the cost.
How to Improve Your Credit Score before Leasing a Car
In most cases, your best option when confronted with a bad credit history is to improve your credit score. Although this can take a while, it pays dividends in the long run, allowing you to get the car you want at a fair price. These are a few easy steps you can take to improve your credit score to prepare for getting an auto loan:
Pay Bills on Time
This is one of the most important and obvious ways to improve your credit score. If you use a credit card frequently, pay off the balance or make the minimum payments every month.
It also doesn’t hurt to make sure you’re paying other bills, such as rent, on time. This can also help improve your debt-to-income ratio, another factor that affects your credit score.
Monitor Your Credit
See if the bank you use offers credit score checks that won’t affect your score. Use these to monitor the health of your credit and make necessary adjustments.
It might also be helpful to sign up for a credit monitoring service. These services can help prevent fraud, which might contribute to low credit scores.
Consider a Loan
Some lenders offer credit builder loans to customers with low credit scores. These loans comprise a lump sum you can use to pay outstanding debts and improve your score.
They are low interest and allow you to show creditors you’re capable of managing debt effectively. Before you take out a loan, remember you’ll be taking on more debt and paying interest on what you borrowed.
How to Increase Your Chances of Approval with Bad Credit
If you decide to lease without improving your credit, you can take a few steps to improve your chances of approval for an auto loan:
Consider a Lease Takeover
A lease takeover allows you to drive a car that was already leased by another driver. This arrangement is also called a lease transfer or a lease swap.
This might be a good option if you and your dealer can find another driver that’s willing to give up the remainder of their lease. You’ll make the monthly payments and have access to the car until the agreed-upon lease expires.
A lease transfer has a few drawbacks. First, you’ll only have access to the vehicle for the rest of the lease, which might be shorter than you anticipated. Second, you might have to pay extra fees associated with the transfer process. Finally, make sure the car is in good condition to avoid paying for damages the other driver might have caused.
Find a Co-Signer
If you’re having trouble finding approval, it might be helpful to get a co-signer. This is a second individual, often a spouse or relative with good credit. Having a co-signer splits the responsibility for the lease and gives dealers a backup if you cannot make payments.
It’s important to note that failure to pay can damage the credit of the co-signer, as well, so make sure they understand the situation.
What Are the Alternatives?
If you’ve gone through all the options and can’t get approved, you still have other options. The best is probably to buy a used car. Buying used offers the advantage of lower monthly payments, and the approval process will be easier.
This can help you save money that might be better spent elsewhere. Whatever you choose to do, be sure to maintain a good credit score so you’ll have more options in the future.
With all these factors in mind, it’s clear that leasing a car with bad credit can be challenging, exhausting, and sometimes impossible. In most cases, your best option is to wait until you’ve improved your credit score.
This will allow you to lease the car you want at a price you can afford. It will also help you avoid wasting money better spent elsewhere. Good luck on your leasing journey!
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
