Credit Problems and Car Leasing
We frequently get asked about car leasing from people with credit problems. They want to know if bad credit will affect their ability to lease or if they will have to pay higher rates than someone with good credit.
Leasing and buying with a loan are different in terms of the risk to a finance company or bank. Leases generally represent more risk because the customer has less equity in the vehicle than he might if he were buying with a loan.
Lease requirements are higher
Leases typically require little or no down payment and are paid off more slowly than loans. A 3-year lease only pays off about 50% of the value of the vehicle, where a 3-year loan pays off 100% of the value.
This means that, at any point in time during a lease, the current market value of a vehicle is less than the amount still owed on the lease. If the lessee should default (fail to pay), the lease company repossesses the car and loses money on resale.
Although this same scenario also exists for loan-financed cars, the risk amount is usually smaller because the buyer has likely made a substantial down payment and makes a larger monthly payment.
Therefore, for someone with credit problems and low credit score, it may be more difficult to be approved for leasing than for buying. A bad credit rating can often be offset, however, by making a down payment and/or making a security deposit. A flawed credit history may also trigger a higher interest rate (lease money factor), although some lease companies offer a lower rate with a larger security deposit.
“ What you pay for your car loan or lease directly depends on your FICO credit score ” |
Potential leasers with extremely poor credit or who have recently declared bankruptcy may find that they can't get approved at all for leasing. Some lease companies are more rigid than others. Dealers often have multiple finance companies or banks to which they can "shop" your lease application.
You are advised to know your credit score before you attempt to lease, or buy with a loan. This reduces the element of surprise when there may be problems. It may also allow you time to correct the problem. . You can get your free score online with a simple signup at special sites such as FreeCreditScore.com.
See our article, Your Credit Score. Know and Understand It for more details.
For people with bad credit who want to lease, finding a family member or friend to co-sign with them might be the best solution. The co-signer is not responsible for the lease unless the original lessee defaults or is late making payments. It's a good way to build back a good credit rating.
Another way to do it
Some people who want to lease a car but have no credit or poor credit may take advantage of another way to lease. It's called a pre-paid lease.
It requires a large cash payment up front that covers the sum of all lease payments and taxes for the term of the lease. You make no monthly payments and simply return (or purchase) your car at lease-end. This allows a lease company to reduce their risk to almost zero -- and allows a high-risk customer to get into a good lease — and build a good credit history.
For more details on pre-paid car leases see Pre-Paid Car Lease - Smart or Not?
Also see, Bad Credit Car Loans.
Return to LeaseGuide ShortNotes Index