When you lease a vehicle, you're essentially applying for a type of long-term financing. The approval process typically involves a review of your credit history, your credit score, your finances and your debt-to-income ratio. While there may be opportunities to lease a vehicle in which your credit isn't an issue, be prepared to involve another party as a co-signer, produce a lot of extra paperwork and pay higher fees and interest to facilitate the transaction.
Why Dealers Use Credit Histories
Leasing a vehicle is a process that's similar to buying a car, and given that an auto loan or lease is one of the pricier types of financial commitment most people make next to mortgages, the financial vetting process can be rigorous. Leased vehicles decline in value the minute they're driven off the lot, so dealers want to ensure you have the ability to pay for the vehicle over the course of your lease period. Examining your credit history is one way they determine how well you've used credit in the past, which can be a good indicator of how well you're likely to use it in the future. They may also ask about any other loans or debts you have, and what your income and living expenses look like. It's all about making an educated guest at how likely you are to be able to pay your lease through agreed-upon terms.
Demonstrating Your Credit Worthiness
There are usually two reasons people don't have a credit history to share with lenders. One reason may be that you had trouble using credit responsibly in the past and have a low score due to missed payments, loan defaults, repossessions, bankruptcy or foreclosure. This is the worst thing for a potential lender to see because it can indicate you're a risky borrower. To overcome this stigma and get a lease, you will likely have to explain your previous poor credit history and why it's a thing of the past. You're also very likely to pay for your past mistakes, including a larger-than-average down payment and a significantly higher interest rate. This is the dealership's ways of protecting itself financially if you default.
Another reason might be that you're new to using credit and simply haven't established a credit history yet. You may be better served taking a few months to build a credit history before applying for a lease, as it will improve your chances for approval, as well as position you for more favorable terms, fees and interest rates. This can be accomplished by applying for low-limit credit cards or secured credit cards, using them wisely, making all of your payments on time and keeping your balance low.
Other Ways to Avoid Credit Issues
If you fall into one of the above categories, you may have other options for securing a car lease that don't involve a review of your credit. You might consider using a co-signer, which is essentially an individual who vouches for your credit worthiness by using their own credit rating to help you secure the lease. While the vehicle and the payments will be your responsibility, the co-signer is on the hook for missed payments if you don't make them. This can lead to a strained relationship with your co-signer, who is often a family member or close friend.
Using a Co-Applicant
If your credit is poor and just needs a boost, or it's non-existent and needs building, applying for a car lease with a co-applicant is another way to get the lease in place without your credit being a major issue. In this instance, the lease will be jointly held with you and another party, likely someone who has strong credit. This is often a good path to pursue between parents and children or married couples, as one can help the other establish and build personal credit.
In short, credit always plays a role when it comes to applying for financing. Your best bet is to build a history of responsible credit to ensure you have the ability to secure future credit at competitive interest rates.
Lisa McQuerrey has been an award-winning writer and author for more than 25 years. She specializes in business, finance, workplace/career and education. Publications she’s written for include Southwest Exchange and InBusiness Las Vegas.