Is Your Credit Score High Enough to Lease a Car?
Your score can affect lease terms and interest rates
No matter how terrible your credit score is—within reason, of course—you'll probably be able to find someone who's willing to lease you a car. The real questions are whether the lease rate they'll offer you will be worth it, and whether leasing a vehicle is a good personal investment over the long term, even if it looks cheaper than buying a car in the short run and the ownership structure is different.
You might find that the credit requirements for leasing are a bit more forgiving than those for purchasing a vehicle, but you'll probably still need a score of at least 620 or so to pull it off. And the best terms are typically reserved for those with scores above 700.
What Is a Car Lease?
Leasing a car is like renting an apartment. You sign a contract and agree to treat the vehicle as your own for a set period of time. Leasing is a short-term responsibility, unlike when you buy a car.
Yes, you'll want to maintain your leased vehicle and avoid inflicting too much wear and tear on it, but at the end of the day, the vehicle isn’t yours. Your payments won’t build equity in the car, but you also won’t be responsible for its long-term future. An exception exists if you cause the damage, of course.
At face value, leasing a car sounds like a perfect idea. You get to drive around in someone else’s new car and hand it back with no strings attached when your lease is up. But you’ll pay for the privilege, and you’ll pay even more if you don't have a good credit score.
What's a Good Credit Score?
Credit scores typically range from 300 to 850. Anything above 740 is generally considered to be a very good score.
But what does this mean in practice? If you have exceptional credit with a score of 800 or higher, you're the least risky borrower for a bank or financial institution lending money. You likely have a long history of using credit responsibly. You maintain low revolving balances on your credit cards, and you always make your payments on time.
But if you're like most people, your credit score probably isn't in the 800s. Only slightly more than 20 percent of all Americans can claim a score that high. But don’t despair: perfection isn't a requirement for leasing a vehicle.
Know Your Score
Forewarned is forearmed. Don't apply for a lease without any clue what the dealership is going to find when it runs your credit. Get a copy of your own report three to six months before you plan to begin shopping. This gives you some time to clear up any inaccuracies.
The Ideal Lessee
You should have no problem securing the best lease terms from a dealer if you're married with a family, live in a suburban area, and have a great driving record along with a credit score over 720—especially if you're looking to lease a safe and reliable vehicle without all the latest bells and whistles. But you should still try to negotiate because you’re the type of client that lenders want to keep.
You might not get the lease terms reserved for the cream of the crop if your score is below 720, but you’re still considered a “prime” borrower if it's above 660. You’re not seen as a risk, and it's very likely that you'll have your lease request approved.
Near Prime Lessees
This is exactly what it sounds like. You’re almost assuredly a safe bet for the bank, but not quite.
You likely fall into this category if your credit score is between 620 and 660. You can either spend a few months paying down the balances on your credit cards or be prepared for higher-than-average lease rates. You’ll probably be approved, but you'll pay a higher price, probably in the form of higher interest rates, because you're deemed to be a bit of a risk.
You might find a lender willing to lease you a vehicle if your credit score is below 620, but you’ll pay much more than an average or even “near-prime” buyer would. And you might be required to put down a security deposit.
What If You Have No Credit History?
Having absolutely no track record for credit marks you as an unknown commodity, which can land you in the subprime heap.
An option for you is to ask a relative or friend to co-sign on the lease with you so that you can begin creating a credit profile. Keep in mind, though, that if you miss lease payments, that negative history will appear on your cosigner's credit report as well. But if you find someone who's willing to take the chance on you, your interest rate will most likely be lower, depending on your cosigner's credit score.
A non-traditional approach to lease financing is lease swaps, in which a lease for a car already being leased is transferred from one person to another.
Turn the Odds in Your Favor
In the end, it can come down to the dealer. Depending on the time of year, you might find one who is nearing the desperation point to move cars off the lot. These dealers might be more willing to go to bat for you with lenders. The end of the year is often a good time.
Listen to radio commercials. Car dealers are always trumpeting sales and deals, and they might even announce outright that they're willing to work with people who have poor credit. Save up to make the most significant down payment that you can. Sweeten the pot for the dealership and the lender. Make them want to work with you.
Also, avoid shooting for that top-of-the-line, loaded set of wheels. Be realistic. Sometimes applying for a less splashy, more inexpensive vehicle can turn the odds in your favor. Think of it this way, too: the lease payments will be lower and more manageable, so you'll be more easily able to keep up with them. Prompt payments improve your credit score.
Don't Make These Mistakes
Shopping for the best deal and rates is usually a pretty good idea, but it can come with a downside. Every time you apply for a lease, the lender runs your credit. These "hard inquiries" can bring your score down even more. You don't want that, so be judicious with your applications. Don't throw one out there that's likely to get turned down, like for that top-of-the-line vehicle.
You might be able to work your way around this problem by getting your credit report yourself, then making copies. Just be sure that it's dated so that the dealer knows it's current. Numerous hard inquiries for the same type of loan or lease count just once if they fall within a limited period of time because you're obviously shopping for the best rate. Don't stretch your lease applications out over six months or more.
Try to drive a bargain even if you think you’ve found the perfect deal. When all's said and done, you’re the one offering to pay the other party a fixed amount monthly for a set amount of time. If the terms they’re suggesting make it so that buying a used car outright would make more sense, say so. The lender might sing a different tune.