So you want to lease a car but your credit score is, well, not so stellar.
Don’t give up! Not only is car leasing a great way to improve your credit, but there are also many ways to make it work for you at your current credit level. First, let’s understand how credit works when it comes to car leasing, and then you can see if it’s the best financial decision for you.
How do credit tiers work?
First, what is a credit score?
Your credit score is a number that banks, lenders and other third parties use to assess your financial reliability. Low credit is a reflection that either you’ve had trouble paying off loans in the past or you simply don’t have much credit history. (Young people with new bank accounts typically have this issue.)
Lending money or leasing a car to someone comes with risks for the lender. What if you don’t pay, or you’re late with payments, or you can’t pay and have to default or declare bankruptcy?
Banks don’t want to deal with this, so they’ll only approve loans (or leases) to people who have proven their ability to pay off debts over time. If they do approve a lease for someone with poor credit, it will usually come with a bigger downpayment to reduce the risk or higher interest rates so the lessee has more incentive to pay it off on time.
Of course, increased interest rates for low credit can seem a bit harsh – like, “Hey, I’m not doing so great financially so you charge me more money?” – but it’s all part of how the banks work to balance investment and risk. (And there are ways to avoid them if you’re clever; I’ll get to that later in this post.)
The credit score you’ll hear about most commonly is called the FICO score, based on the data analytics company Fair, Isaac and Company. FICO scores typically range from 300-850. There are a few different ways to divide and rank these scores, for example:
Another way is the Tier 1/2/3 system.
This ranking is often used by car lenders to determine at a glance what category of lessee you fall into and what interest rates to offer you.
|Tier 1||700-740 and above||Excellent|
Anything below that would be considered poor credit.
From Tier 2 up, you can usually get approved for a lease with good terms and low-interest rates. Below that, you might get approved only with higher interest and extra fees, or not approved at all.
Which car companies will approve you for a lease with low credit?
Not all car companies are the same and not all of them have the same requirements.
When you lease a car, although it may seem like you are signing a contract with the dealership, actually the agreement mostly has to do with the lender or the bank that finances the lease. This is typically a branch of the car company, such as Nissan Finance or Toyota Financial Services.
Ask your dealership which companies are more likely to approve low credit leases. At the moment, at Capital Motor Cars our customers with poor credit are getting approved for cars from Ford, Honda and Toyota, but not from Nissan and others.
Sometimes you’ll also find special credit deals on particular models, so be flexible and shop around.
Leasing alternatives if you have bad credit or no credit
Sometimes people with bad credit or no credit are recommended to buy a car instead, since it’s often easier to get approved for a loan than a lease. However, looking at the bigger picture, this usually isn’t the best decision.
When you finance a car to purchase, you are locking yourself into a long-term financial commitment based on your credit at the time you sign for the loan. This can be five or ten years paying high-interest rates that may leave you upside down on your loan (owing more than the car is worth).
With leasing, you pay more per month but you’re only committing yourself for two or three years. And at the end of that period, you’ll come out with much better credit than when you went in!
Leasing a car, if you play your cards right and stay on top of your monthly payments, is actually a great way to improve your credit score.
If you think you can’t get into a lease with your current credit, don’t despair! There are a few options for you.
1. Choose a lenient car company.
As I mentioned earlier, some car companies are more forgiving than others. Look for cars from one that has a record of accepting lessees with lower credit.
2. Get a co-signer.
Getting a co-signer with good credit on your lease allows you to qualify for any lease that they can get approved for. It’s probably the simplest and easiest way to get approved for a lease on good terms.
3. Put more money upfront.
If you have low credit but plenty of money in the bank, you may be able to get into a lease by offering a bigger down payment. This takes out some of the risk for the lenders, making it safer for them to approve your lease.
4. Transfer onto a lease.
One less-known option is lease-swapping, or transferring onto someone else’s incomplete lease.
Sometimes people want to get out of their lease early, and one of the simplest ways to do that is to get someone else to take it over. Since that lease is partially complete already, lenders are more lenient with credit scores.
By the time you’re done with that shorter lease period, your credit may have improved enough to get a lease on your own terms.
Leasing a car is definitely easier (and cheaper!) with good credit. However, there are many options for those with bad credit, and given the boost, it gives to your credit score, it’s a worthwhile investment for many people with poor credit. As car leasing becomes more and more popular, there’s more flexibility and increasing ways for everyone to get behind the wheel. If you’re unsure if you’ll get approved for a lease with your current credit score, considering filling out a personal credit application. We can check your score and let you know what car brands you qualify for, so you won’t need to shop dealer to dealer.