Leasing a car with bad credit
Low monthly payments are a large factor that turns people towards leasing new cars instead of buying them. However, if your credit score isn’t great, you may not have the option for lower payments, and possibly not get approved to lease the vehicle you want. The first thing a leasing company looks at when considering doing business with you is your credit score. The level of risk involved is determined by your credit history. Some companies are willing to write leases for people with low credit scores, however, the monthly payments and interest will be much more expensive.
How does credit relate to your interest rate?
Low-interest rates can help you save thousands of dollars on a lease. Your credit history determines which interest rate you are eligible for, which is why it is important to know your past. Most people don’t have a perfect credit history which means that no matter who you are, the interest rate will be an issue of concern. Deals that are advertised as ‘amazing’ deals with ‘nothing down,’ and ‘no interest’ are for people who have a credit score of 700+. Before trying to get the best interest rate, improving your credit is something you should consider.
What is the ideal credit score for leasing a car?
Credit scores of 700 or better are typically what auto leasing companies look for. Different lessors and vendors interpret credit scores differently. Poor credit scores are 579 and below, average credit scores range from 580 to 669, a good credit score is usually around 700, and excellent credit scores are seen as 800 or better.
Credit scores are also referred to by using an alphabetical letter to categorize them. This system is used by most lenders during the process of rating one’s creditworthiness.
| Number Rating |
700+ A
670-699 B
640-669 C
under 639 D
|
Securing an auto lease with a credit score in the fair to poor range is typically difficult. You may have better luck buying a car with an auto loan, especially on newer vehicles.
How does poor credit affect auto leasing costs?
Leasing is a big commitment because you're agreeing to rent a car for a fixed number of months (usually 36) and lessors don’t want to lose money or waste time by trusting someone with a bad credit score. At the end of the leasing period, you’re supposed to turn the car back in with a “like-new” condition and if you fail to do that, you have those fees added on top of the other costs of leasing.
When it comes to leasing, there are various additional costs you might not consider at first but are important to consider. Some of these costs include:
- Acquisition fee: The cost of this is usually less than $1,000 and its a processing charge required for originating a lease. The same fee is usually charged on every lease regardless of the monthly payment amount, and the price is usually non-negotiable. You can either pay the fee upfront or roll it into your monthly charges to spread out this cost over the lease term.
- Security Deposit: A security deposit is required by auto leasing companies and it is roughly close to the cost of one month’s lease payment. At the end of the lease period, you can get this money back, but if the car is not in like-new condition, the lease company will use this money to fund repairs and maintenance.
- Capitalization Reduction: Just like a down payment, this payment can be used to reduce the base price and calculate amortization. This optional upfront payment can trim down monthly payments and be used for your benefit.
- Gap Insurance: In case you total a leased vehicle in an accident, this optional added insurance policy is designed to cover you. Any difference between what your auto insurance company pays out on the loss and the residual value of the vehicle is covered by a gap policy. This lease can prevent large expenses for bad accidents. Although the likelihood of needing gap insurance is small, it can save you a lot of money in case of an emergency. Make sure that you’re not paying double for this insurance because some lease companies have gap insurance (and associated fees) embedded into their contracts.
- Disposition fee: This fee is typically hundreds of dollars (but less than $500), and charged by leasing companies at the end of a term to prepare the vehicle for resale. Washing and detailing the car, document processing, and other maintenance expenses are covered by this fee. This fee may be deducted from your security deposit if you buy the vehicle at the end of the lease period.
What can I do to improve my credit?
It is important to remember that even if you have bad credit, you can always improve your score by taking action to fix it. This should help your likelihood of being approved the next time you apply for a lease.
A good place to begin when improving your credit score is the explanatory information that lists the main reasons why your score isn’t as high as it could be. The best ways to begin improving your credit score are:
- Steer clear of late or missed debt payments
- Make payments towards high credit card balances
- Don’t open new credit accounts unless you really need them
Bottom Line
The power to improve your credit score is in your hands. You can choose how you handle your finances which can help or hurt you when it comes to leasing and other aspects of your life. Steering your credit habits in the right direction can help you drive up your score and earn the low lease costs you want.
