How to Lease or Buy a Car With Bad Credit
There is a common misconception that leasing is easier and requires less credit than buying with a loan. Not true, but there may be solutions.
People with serious credit problems frequently have frustrating experiences when looking for car loans and leases, particularly in times of tight credit and economic stress.
Many banks and finance companies have tightened up and are much more careful about doing business with “subprime” borrowers with poor credit histories.
However, car manufacturers and dealers are so competitive and desperate for business that they are often willing to take some extra risks to get business.
Generally, people with “subprime” credit (low credit score) should expect to pay higher interest rates, be required to make higher down payments, or make a security deposit (for leasing). They may even have problems getting auto insurance. It’s good to regularly check your credit report for mistakes to make sure your data is accurate.
Analyze your credit situation first
If you have poor credit, do you know why? Do you know just how bad it is? There are varying degrees of bad credit. Some are seriously bad; some not so bad. A couple of late payments on a credit card account is not as bad as a recent bankruptcy or home foreclosure. Some problems can be quickly repaired; others take longer.
Since car dealers and finance companies don’t have time to read through credit files in detail, they typically only look at your credit score, which is a single number that summarizes your entire credit history. Customers should always know their FICO credit score ahead of time before being surprised by a car dealer. Get your Experian Credit Report FREE at freecreditreport.com
A good history of car payments can be a positive to your credit score for a car loan or lease, even if you have had late payments on other debts.
Your credit score is a measure of your credit worthiness and can range from 300 to 850. The median for consumers in the U.S. is about 720. A score above 680 or 700 is considered “prime” and will get you the best rates. If you’re below about 620-640, you’re considered “subprime” and you may have problems.
Sub-prime borrowers can expect to pay higher interest rates on loans, mortgages, and car insurance. Those with credit scores in the 500’s or below can expect to be refused altogether.
“ What you pay for your car loan or lease directly depends on your credit score”
There are actually three credit bureaus that can report your credit score to car dealers and finance companies. However, unless there are errors in one of your credit histories, all three scores will be substantially the same. Your score is simply a number that represents your credit worthiness, based on your past history of payments on your credit accounts.
Let’s make it clear: your credit history report is different from and separate from your credit score. Lenders only look at your credit score. However, since your score is based on the information in your detailed credit report, you should make sure the information in your report is accurate.
If you have a poor overall credit score and you’re considering a car lease (or loan) and you’ve had a car loan in the past on which you made on-time payments and never missed payments, you have a much better chance at being approved for a new lease or loan than your overall score might indicate.
Shop for the best rates at lenders who specialize in “sub-prime” loans
Dealers and their associated finance companies are not your only source of car loans, especially for people with poor credit. You can arrange you own pre-approved loan online. In fact, if you have bad credit, most conventional lenders such as CapitalOne, Chase, Wells Fargo, and manufacturer’s finance companies refer your loan request to a sub-prime lender.
A good online lender that specializes in financing cars for people with credit problems, past bankruptcies, or even repossessions is Auto Credit Express , one of the largest such companies in the country with a great BBB rating and customer satisfaction history.
Cheap used cars reduce loan amount and improve chances of approval
For people with poor credit, getting a car loan on an older used car might be the right answer. The loan amount will be less than for a more expensive car, which improves the chances of being approved. Look at our Car Deal Finder for good used cars at reasonable prices.
Lease takeover might be the solution – easy and cheap
An answer for many people with bad credit will be a lease takeover, known as a lease assumption, or lease transfer. You take over a car and lease payments from someone who needs to get out of their lease.
Although the lease company has to approve and check your credit, the requirements are not as strict as with a new lease, and “sellers” typically offer a cash incentive with no down payment to make the deals very attractive for people who need a good way to drive a relatively new car at little or no out-of-pocket expense. Online companies such as Swapalease.com help match up lease “sellers” with interested “buyers.” Check the Swapalease web site to find cars in your area. This can a good answer for people who need a car but have limited finances and less-than-perfect credit.
If you can’t get approved for a bad credit lease or loan
If your credit score is too low, you may not be able to get approved for a car loan or lease. In that case, your options are very limited. Let’s list some of those options:
•Save cash for a “starter” car and trade up as your finances and credit improve in the future
•Borrow money – or a car – from family or friends
•Borrow money against a 401K fund or home equity
•Find a used car being sold by an individual who is willing to take payments (use great caution here)
•Get a loan with a co-signer, someone who will be responsible if you default on your loan
•Buy from a buy-here-pay-here used car dealer. They don’t check credit but loan interest rates are very high.
•It’s a long shot, but consider applying for a free car provided by advertising agencies (see Free Cars – Fact or Fiction?)
Build (or rebuild) a good credit history
Creating a good credit history for the first time, or rebuilding after a credit disaster, can be accomplished by some or all of the following steps:
•Pay down your largest credit card balances so that there is a large difference between your balance and the card limit
•Don’t close credit card accounts you don’t use. The open credit limits on those cards help your credit score.
•Open a few new credit card accounts, but not all at the same time. Use them occasionally, pay off the balance each month.
•Open department store and gas card accounts. Use them but keep balances at zero or low.
•For people with seriously damaged credit, get a secured credit card. Secured credit cards are available from large national banks such as JPMorgan Chase. You’ll have to make a security deposit first but it’s not a debit card. It works like a normal credit card and can help restore your credit.
•Get a small personal loan from a local bank or credit union. Interest rates may be high but if you pay it off relatively quickly, total finance charges will not be significant.
•Get a car loan and use a co-signer. Using a co-signer allows you to get relatively low rates and helps you build your own credit.
•Pay all bills on time. Don’t be late and don’t miss payments. A single late payment can be very damaging
•Don’t allow a car loan default and repossession. It seriously damages your credit for seven years.
•Don’t file for bankruptcy. It damages your credit for 10 years.
Buying a car, or leasing a car, with bad credit is not easy. But it’s not impossible. It requires some careful shopping to find a good lender and get the lowest rates. It also requires some self-discipline to make sure the bad credit situation isn’t made worst but, in fact, gets better. Since leasing typically requires better credit than buying with a loan, buying can often be a better option for credit-challenged buyers.
If you are having problems with your current car loan or lease payments, see our article, Can’t Afford Your Car Loan or Lease?