You just got your license, and you have a job to get to after school. You don’t want to take the bus one more day. You’ve finally decided, it’s time for a change. Time to get a car.
The money you’ve saved up over summer is only enough to get you a ten-year-old rusted out beater. You don’t need anything super-fancy; you just need a car that runs.
Are you eligible to finance a car? Perhaps, but if you’re young and haven’t had an opportunity to build a credit history, you’re financing options are limited. Even if your credit isn’t quite up to par, there are still options.
Can you lease a car with bad credit? Absolutely. Though the terms may differ slightly, bad credit does not have to hold you back from leasing or buying your dream vehicle.
The Pros and Cons of Purchasing a Car
Before discussing leasing options, explore whether purchasing a car outright is the best move for you.
If you do not have a sufficient cash to purchase a vehicle, you can finance a portion of (or maybe even all of) the cost. While this will guarantee you a monthly car payment, once you make the final payment, the car is yours. You will own the entire vehicle free and clear.
Owning a car also frees you up in terms of mileage. You can drive the car as far as you like without worrying about any additional charges. If you accidentally spill your coffee on the passenger seat in your rush to get to work, you can simply shampoo it and worry about the stain later – after all, it’s your car.
If you’d like to replace the audio system or install wheel rims, you can. There are no limits to the customizations you can make on your own vehicle.
Even though eventually you will pay off the car and not have to worry about payments any longer, the payments are a huge strain on your budget in the meantime. They are typically much higher than a monthly lease payment. Also, depending on your credit score, you may need to put down a bigger down payment before you receive loan approval.
Sure, the car will be entirely yours someday, but it’ll be an older model by then. Cars are depreciating assets. Don’t expect it to be worth nearly as much as you paid for it by the time you make the last payment.
Lastly, since you plan on keeping the car throughout the length of the loan and hopefully beyond, you can expect the vehicle to need repairs. Once the warranties run out, you are on the hook for expensive, time-consuming fixes as needed.
How Does a Lease Work?
A car lease is based on two factors: the price of the car and how much it will be worth when the lease ends. The total price of the car is called the capitalized cost. The amount the car is worth when the lease expires is called the residual value.
Since the leasing company puts limits on mileage and issues strict instructions on proper care of the vehicle, they are accurately able to calculate how much the car will be worth at the end of a lease. The difference in the original capitalized cost and the residual value once the lease is over is the amount the driver must pay, averaged out over the months of the lease.
For example, a $15,000 car on a 24 month lease may have a residual value of $8,000. The $7,000 difference is what the driver must pay, plus interest on the entire capitalized cost. Once the lease ends, the driver has the option to buy the car, outright or through financing, the residual value leftover.
How Does Leasing a Car Compare to Purchasing?
Leasing a car has its own pros and cons that provide a different array of benefits to the car driver.
Depending on the applicant’s credit score and the amount of money used as a down payment, the monthly lease payment may be much lower than a car payment for the exact same vehicle.
Since the driver has no commitment to keeping the car after the lease, leasing companies do not have to concern themselves with depreciation and the auto market. The exception is an open-end lease, which requires that the driver purchase the car at the close of the lease.
Any major vehicle problems are always covered under the manufacturer’s warranty, due to the low mileage.
Many organizations have lease agreements catering to limited or bad credit applicants who still need a vehicle but cannot receive all-out financing approval.
Mileage limits cramp the style of many drivers. If you have a long commute or enjoy road trips, you will not be able to use your car as much as you need or would like to. If you go over the mileage, you are charged a number of cents per mile which can quickly add up.
You must keep the car in good working order. If you stop bringing it in for regular oil changes you may face penalties. If there is wear and tear on the interior you will have to pay for repairs when the lease expires. You are not able to alter the car’s interior or exterior in any way.
Leases are not terminable. If you must stop the lease, you have to pay the remainder due on the spot in addition to any early termination fees.
At the end of the lease, all you have paid for is the privilege of using the vehicle for the specified amount of time. You have no equity in your name.
How Will Your Credit Score Affect Your Options?
Bad credit will further affect the pros and cons of both leasing and buying.
Purchasing Outright with Bad Credit
Bad credit scores require borrowers to pay 14 to 20% in interest. Additionally, they are not able to stretch out the length of the loan. They usually only are allowed a maximum of 36 months to finance the car. They also must place a larger down payment, between 20 to 50% down on the vehicle. They also may be expected to make bi-weekly payments on the loan, as opposed to one monthly payment.
Leasing with Bad Credit
Even though you can still expect to pay higher interest rates, you can lease a car with bad credit. However, bad credit does not normally affect the length of the lease, as most leases range from 24 to 48 months anyway. Also, while bad credit leasers may need to place a larger down payment on the vehicle than those with good credit, the required payment is normally not as high as the amount needed to finance an entire vehicle purchase.
In the end, you will see negative repercussions in both purchasing and leasing a car as a result of a bad credit score, but if you also do not have much cash to use up front, a lease may be the better option. And to top it off, bad credit leasers will be driving a newer model car to boot.
Leasing with bad credit is proving to get easier and easier. In 2012, the lease approval rating was at 65.3%. December 2013 alone saw a lease approval jump from 70 to 73.3%. Subprime loan approval ratings went up the highest, which is good news for those with bad credit.
Know What Affects Your Score
Even if you have made peace with the fact that you have bad credit, it does not have to stay “bad” forever. The only way to increase your score is to understand what factors influence the overall number the most. Here’s what to watch out for:
Payment History: Making payments on time is the single most influencing factor when it comes to credit score calculation. It accounts for 35% of the final number. If you have payments that are past due, the credit report will track how much you owe and how long it has been overdue, which will then translate to a lower or higher credit score. This category includes bankruptcy and judgments against your accounts.
Amount Owed: The term “credit utilization ratio” might not mean much to you, but it means a lot to your credit score – 30% worth. If all of your lines of credit are completely maxed out, you have a high credit utilization ratio, which does not translate well to your overall credit score. It does a borrower well to only utilize 30% or less of all of their available credit, both as a whole and on an individual basis.
Credit History: The longer you have your accounts open the better. A long history will show potential lenders that you have been in the game and know how it works. This factor affects 10% of your total score.
New Credit Inquiries: If you place a number of new credit inquiries close together, it will cause your credit score to drop. Try to only apply for credit when you absolutely need it and when you are relatively certain you will gain approval. This category affects 10% of your total score.
Credit Variation: Also accounting for 10% of your total score, having many different types of credit is a positive mark. It shows lenders you understand and are able to manage store credit, consumer credit, vehicle and personal loan financing.
Check Your Credit Score in Advance
If you’ve read this article and find it to be bearing good news, you’re probably excited to find out more about your specific options. Don’t run out and apply just yet. Make sure you know the state of your credit before you assume, whether it’s good or bad. Here is a list of credit categories lenders use to measure varying credit scores:
- Excellent Credit: 781-850
- Good Credit: 661-780
- Fair Credit: 601-660
- Poor Credit: 501-600
- Bad Credit: below 500
You are entitled to access your free credit report three times per year using the website www.AnnualCreditReport.com. You can review online or print out your credit report from each of the three major bureaus: Equifax, TransUnion and Experian. While the report is different than the score, it can still pinpoint the issues that may be present in your history so you can either correct mistakes or take action to pay down debt that is having a negative effect on your rating.
It is best to begin analyzing your credit at least six months before you look for a lease or into vehicle financing. This will give you enough time to begin repairing your credit so lenders and leasers can see that your score has risen in previous months. An upward trajectory helps even more when you are trying to find out if you can lease a car.
What to Look for in a Lease
The ideal lease vehicle is one that holds its value over time, making the difference between the capitalized cost and residual value minimal. Then the driver will end up financing less and the payments will be lower. While the dealer will explain the residual value, make sure it is as close to 60% as possible. Most range from 45 to 60%.
In most cases, lease deals will require origination fees. While this charge is not normally negotiable, you may be able to convince the dealer to lower or eliminate the security deposit. Work with a leaser that is willing to examine your situation, bad credit and all, and work with you to hammer out a deal fit for both parties.
Finally, never sign a lease without understanding the fine print. If you are opting in to a contract that cannot be broken under any circumstances, consider the cost and benefit before making a final decision.
To sum it all up, “Can you lease a car with bad credit?” Most definitely yes. You could purchase one as well. But as with all serious financial decisions, consider how the bad credit lease will affect both your monthly budget and your long-term prospects before making a firm commitment.