Unlike buying and owning a car, leasing is similar to renting, as you pay to use the car for a period of time. You can save money by leasing or get more car for your money, but you need to effectively manage a few key areas: take good care of the car, stay within the mileage limits and lease a car that has a strong residual value, its worth at the end of the lease period. A credit score above 700 enables you to get the lowest interest rates and best payment terms.
To Lease or Buy
Leases enable you to pay less on a monthly basis than getting a loan and eventually owning the car. This is due to the fact that you turn the car in after the lease period, typically in the range of 24 to 48 months. However, if you neglect the car and cause excessive wear and tear to the interior and exterior, or drive more than the minimum miles, it can cost you more than you bargained for. Typically you pay around 15 cents a mile for extra miles and may incur other charges for any damages to the car.
Auto lenders and lessors examine your credit scores when determining the interest rate on your loan or lease. Your credit score ranges from 300 to 850. Having a higher credit score qualifies you for a lower interest rate -- which translates to a lower monthly payment. Typically, a score of 700 or higher indicates to the lender that you deserve their best rates. If your score is above 680, but below 700, your rate may rise a little, around 1 to 2 percent higher than the best rate.
Other Credit Tiers
If your score drops below 680, the lender classifies you as a subprime borrower, which means that you have some credit issues. This can cause your rate to go up 3 to over 8 percent from the best rate. Once you drop below 640, you'll find it difficult to get a lease, but some more flexible lenders may go as low as 600 depending on other factors, such as how much you pay as a down payment.
Residual value is the value of the car at the end of the lease, or how much it will cost if you decide to buy it when your lease is over. The lessor sets this value at the start of the lease. If possible, choose to lease a car that loses less value over the course of the lease term, especially if there's a chance you’ll buy it when the lease ends. You can visit websites like edmunds.com or kbb.com to determine the cars that lose the least amount of value each year.
Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.