Leasing a car can appeal to you if you prefer lower monthly payments, fewer hassles with maintenance and repair costs and flexibility to switch vehicles. But to take advantage of this option for getting a car, you need to have a clean credit report and a credit score that isn't subprime, unless you can find someone to co-sign. Your credit score is just one important factor for a car lease since the dealership will also consider your earnings and other obligations.
Take a look to learn more about the requirements for a new lease and what you can do to overcome concerns about bad credit.
Understanding a Car Lease
A car lease is an arrangement where you drive a vehicle from a dealership for a period of time, such as 24 or 36 months, and you make payments during that period to cover the use of the car. The monthly lease payment is determined based on financial figures such as the manufacturer's suggested retail price, the residual value, depreciation and interest rate. This arrangement means that you're doing a long-term car rental on your leased vehicle where you'll usually either turn the vehicle in at the end or decide to pay money (residual value plus other fees) to buy the car.
Leasing is usually used for new cars and comes with terms in the lease agreement that you have to follow to avoid ending up with extra costs when the lease expires. For example, the dealership might limit you to 15,000 miles per year before you pay overage fees.
There may also be restrictions on where you can use the vehicle. So, if you plan to drive it for cross-country business travel or want to cross the border to Canada, you have to consider your lease terms to ensure you're not breaking them or setting yourself up for costly fees.
Read More: How to Lease a Car
Knowing Whether to Lease
Depending on your finances, driving habits and preferences, leasing may appeal to you over buying a vehicle. Car leases tend to come with lower monthly payments than an auto loan and remove the concerns you might have regarding sales tax and depreciation. The vehicle should have a warranty that takes care of repairs for you, and the dealership may include some maintenance services too. Leasing also gives you the freedom to choose a new car every few years and benefit from a wide selection.
However, leasing can cost you more money than buying if you're a frequent driver, you end up damaging the car or you plan to buy the vehicle at the end of the term. If you want the most flexibility in how and where you drive the car, lease terms like mileage allowances and location-based rules could discourage you from leasing. There's also the fact that you're limited in how you can customize a leased car since modifications often violate the lease terms and can lead to significant end-of-lease charges.
Credit Score Requirements for Leasing
When you want to lease a car, the dealerships analyzes your credit history and score to look for signs of credit overuse or misuse. You can expect to need at least a fair or good credit score to get approved for a lease.
Experian reports an average credit score of 729 – which is between good and very good – for people who leased cars in 2020. It also mentions that those with credit scores below 660 make up a small proportion of people leasing vehicles. For these people, dealerships require compensating for the lower score with a higher income, sizable down payment or higher interest rate.
NerdWallet suggests that people who have credit scores under 680 may have better luck buying a used car than leasing a new one, although you could possibly still qualify to lease if you're willing to pay higher lease payments or settle on a cheaper or older vehicle.
The reason that buying a used car with financing may be easier than leasing is that some dealerships offer in-house loans to people with credit history problems. They let you show other financial information that proves you can afford to make regular car payments.
Income Requirements and Upfront Costs
Just as you'd have to show sufficient income and steady employment to take out a car loan, a car dealer wants to see the same when you fill out a car lease application. The comparison of your leased car's monthly payments to your earnings and other debts will matter more than just getting you approved in the first place. After all, you won't want the hassles of making a lease payment you struggle to afford each month.
The dealership calculates a debt-to-income ratio, which is the total amount of monthly debt payments (with your lease included) divided by your monthly income. The upper limit is usually 50 percent; otherwise, you may need to look at a cheaper car or find ways to make extra money or reduce current debts. So, if you make $4,000 a month but have mortgage, student loan and credit card bills topping $2,500, you can have trouble getting lease approval.
Another financial requirement you might find with a car lease is money due at signing. This is comparable to a car loan down payment since it can reduce your monthly payments, except that you aren't putting money down toward owning the car. If you need to get a large down payment together, beware that the money may work against you in the case of a car accident early in your lease term. Basically, you can't expect to get that upfront cash paid back even if insurance covers the car.
Overcoming Obstacles in Getting a Lease
If a bad credit score or high debt-to-income ratio makes it hard to get a car lease, you have another option to consider besides giving up or buying a used car instead. Applying with a co-signer could help you satisfy the credit or income requirements at the dealership and even get you a lower interest rate. A co-signer is someone who trusts you enough to become responsible for your lease if you can't pay. This person should have a good credit score and not too much in debt in proportion to their income.
The dealership considers the co-signer's finances during the lease application process to boost the available income and offer a more satisfactory credit score. You still need to make the lease payments, but if you don't, then the co-signer has the obligation. While beneficial to you, this arrangement can get messy if you start struggling financially, so it requires serious consideration and discussion with the co-signer.
If you don't need to lease a car right away, you might find it better to take some time to build credit and correct problems on your credit report. Actions like paying off credit cards with high balances, resolving collections accounts, maintaining a good payment history and limiting new credit applications will help.
Read More: How to Quickly Improve Your Credit Score
Proceeding With a Car Lease
Before going to a dealership to lease a car, you need to gather your key documents, like a check for any upfront costs, proof of income, a photo ID and any paperwork related to a car you plan to trade in first. The dealership will run your information through their financing department to determine whether you qualify for a lease. If you qualify and proceed, you need to pay any upfront costs and sign a car lease agreement that discusses your financial obligations, rules for the lease and options for when the lease period ends.
- Experian: What Credit Score Do I Need for a Car Lease?
- NerdWallet: What Credit Score Do You Need to Lease a Car?
- Georgetown Toyota: What Do I Need To Bring To a Loan/Lease/Credit Appointment?
- Credit.com: What to Do Before You Lease a Car
- SmartAsset: 5 Costly Car Leasing Mistakes to Avoid
- AutoLux: Do You Need a Cosigner on Car Lease?
- Federal Trade Commission: Financing or Leasing a Car
- Earnest: How Does Leasing a Car Work? 7 Steps to Get the Best Lease Terms
- Credit Karma: What Is Car Leasing?
- Nationwide: Should You Lease or Buy a Car?
- Real Car Tips: 8 Biggest Disadvantages to Leasing a Car
- FICO. "Average U.S. FICO Score Hits New High." Accessed Sept. 21, 2020.
- Consumer Financial Protection Bureau. "Borrower Risk Profiles." Accessed Sept. 21, 2020.
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.