Can You Lease a Car With Bad Credit

June 12, 2023

As inflation grows, the process of making big purchases is becoming more and more complicated. What do you do when money is on the tighter side, but you feel it’s time to get newer wheels? Do you need good credit to lease a car?

You can lease a car with bad credit, but you likely won’t get a great deal. The lower your credit score, the higher your rate is likely to be.

What Is the Minimum Credit Score You Need to Lease a Car?

In order to obtain the most reasonable terms for your car loan, you’ll usually need a credit score within the range of between 661 and 780. If your credit score falls below this range, you may still be able to rent a car, just with less favorable loan terms.

Why Is It Harder to Lease a Car Than Buy a Car With Bad Credit?

If you’re approaching the auto market with bad credit, you have two options: to pay for a car in cash or to lease it. Depending on how poor your credit is, purchasing the car may be in your best interest instead of leasing. It’s more difficult to lease a car than buy one if you have a poor credit score because bad credit indicates to lenders that you may struggle with the financial responsibility.

When you purchase a car in cash, there’s no need to go to a lending party for your financing. For individuals with bad credit, this option — although costly — will be your best bet for a seamless purchase process.

Things to Consider When Leasing a Car With Bad Credit

Considering leasing a car? This is a significant decision and is not one to be taken lightly. Make sure to do your research before taking the plunge, especially if your credit score is less than prime.

Prepare for High Costs

If you go to lease a car with bad credit, you need to get ready to pay a larger down payment and a higher interest rate.

When you purchase a car, you become responsible for wear and tear from your car usage. When you lease a car, the lender is responsible and may charge extra to mitigate this risk.

Understanding the Limitations of In-House Financing Due to Bad Credit

In-house financing also referred to as captive or dealer financing, involves obtaining financing directly from the leasing company or dealership. When your credit history has been blemished by poor credit, it’s essential to know the restrictions of in-house financing. While this option may offer certain advantages like a simplified process, flexibility, customization, and easier approval, it also comes with specific drawbacks that must be considered:

Limited financing options: In-house financing with poor credit limits you to the dealer’s financing options, which may reduce your ability to explore a wider range of loan terms and conditions.
Higher interest rates: Borrowers with poor credit are usually more likely to face higher interest rates with in-house financing, which can result in increased costs over the duration of the lease agreement.
Lack of competitive rates and terms: Dealerships offering in-house financing have little incentive to be competitive with their rates and terms. As a result, you may miss out on more favorable offers for your credit situation from the external financing market.
Reduced flexibility: Compared to external financing options, there’s usually less room for negotiation with in-house financing provided by dealerships. This can limit your ability to tailor the lease agreement to your specific credit needs.
Dependence on the dealer: In-house financing can make you more reliant on the dealer throughout the lease term. This dependence may limit your options in case you encounter issues or want to explore alternative solutions.
Potential balloon payment surprise: It’s important to be aware that in-house financing agreements might include a balloon payment at the end of the lease term. This unexpected lump sum payment can catch you off guard if you haven’t fully understood the terms and conditions.

If you decide to pursue in-house financing despite the limitations posed by bad credit, it is crucial to exercise caution and thoroughly research reputable dealerships. Carefully evaluate the offered interest rates, lease terms, and conditions to ensure you secure the best possible deal. It would help if you also made an attempt to negotiate the terms as much as possible to attain a lease agreement that is favorable to your financial situation.

Expect Restrictions

As with many other credit lenders, dealerships also tend to impose stricter criteria on those with poor credit. Lenders associate bad credit with higher risk, which can lead them to offer limited options and higher down payment requirements to offset said risk. If your credit is suffering, prepare to face difficulties in obtaining approval for a lease.

Leasing companies may also restrict your vehicle options. Only certain lower-tier models are accessible to applicants with poor credit, which may affect your ability to find a car that meets your wants and needs.

Lack of Equity

One significant downside to leasing a car with bad credit is the lack of equity in the vehicle. Leasing does not allow you to build any sort of ownership or equity in your vehicle. At the end of your term, the car is returned to the lender, and you receive no ownership stake or trade-in value.

Leasing a vehicle with poor credit does not allow you to improve your credit score, unlike when purchasing or financing a car. The payments you make on a leased car usually don’t significantly impact your credit score; therefore, if you’re aiming to rebuild your credit, leasing may not aid you in that venture.

Your leasing agreement will likely come with penalties for early termination. If you end up unable to afford the lease payments — or if you need to return the car before the end of your lease term — you may face significant penalties or fees, further compounding your financial challenges.

Alternatives to Leasing a Car With Bad Credit

If your credit is low, but you still need transportation, you have options besides leasing.

Lease Transfers

A lease transfer — also referred to as a lease takeover or lease assumption — refers to the process of transferring a leased vehicle from one person to another.

The original lessee (the person who leased the car first) transfers the lease to another person, known as the new lessee or the transferee, who takes over the remaining lease term, monthly payments, and any other obligations specified.

This practice can allow you to exit a lease early without paying excess fees or penalties.

Car-sharing services, such as Turo or Get Around, and ride-sharing apps, such as Uber and Lyft, are highly beneficial to those unable to buy or lease a car. You can pay by the ride and save money on a car payment, insurance, etc.

Working With a Special Financing Department at a Dealership

Your dealer may have a financing department to help you set up an individualized plan. Work with your dealer to obtain options and information, but don’t forget to negotiate and do your research.

Buy a Used Car

Used cars are almost always cheaper than new models. Shop around for used cars at dealerships, used car lots, and online marketplace platforms to save a bit of cash.

Wait and Work on Your Credit

If your credit situation is dire, and the restrictions and costs associated with leasing a car seem too intense, you may need to delay acquiring a car for a bit while improving your credit.

Ways to Improve Your Chance of Lease Approval

There are things you can do to improve your chances before applying.

Make a Large Down Payment

The larger your down payment, the more trust you will build between yourself and your lender. Not only this, but a significant down payment will also decrease the amounts of your monthly payments, making leasing a far more affordable option.

Get a Loan Cosigner

If your credit score isn’t quite up to the requirements, you can ask a trusted friend with excellent credit to cosign your loan. This practice requires significant trust and responsibility but can significantly increase your chances of being approved.

Aim to Lower Your Debt-to-Income Ratio

A lot of issues with credit can arise from a high debt-to-income ratio. Analyze your financial situation, and determine areas where you can decrease that ratio by lessening your debt, increasing your income, or both.

Shop Around

Do your due diligence. You’ll often need to browse different dealers and options to secure the best possible deal on your lease.

How to Improve Your Credit Score

When you make an effort to improve your credit score, you open yourself up to greater financial stability and better access to borrowing opportunities. It will take time and a bit of work, but you can increase your score and improve your situation. These simple steps will help you get started:

Always pay your bills on time.

Keep credit card balances down.

Don’t open unnecessary accounts.

Build a good credit history.

Build a long credit history.

Consult your credit report regularly.

Be careful with new credit applications.

Consider working with a creditor.

Should I Lease a Car With Bad Credit?

The short answer: yes, you can lease a car even if your credit is poor. However, you should be highly aware of the risks involved. If you feel you can handle the higher interest rates and down payment; the restrictions imposed by the dealer; and the lack of equity and credit involved, you may be able to handle leasing a car with bad credit. If this all seems a little too risky for your circumstances, it may be a good idea to hold off on the car and continue building your credit.

Dick Says Yes Auto Credit Experts

Did you know Dick Hannah Dealerships is the No. 1 specialist in bad credit car loans? If you’re struggling to get into a vehicle because of your credit score, we can help you get approved for financing, sell your car, and more. Our credit experts at our Gladstone and Vancouver locations are ready to help.