Credit Score To Lease A Car
It’s estimated that around one in four vehicles is leased rather than bought in the United States. Choosing between leasing your vehicle and buying it can be a hard decision in itself. However, the decision gets even more complicated when you’re considering leasing vs. buying a car with bad credit.
Both options have pros and cons—leasing isn’t for everyone, but it depends on your situation. And your credit history and credit score can have a significant impact on your ultimate decision.
How does leasing a car work?
Leasing a car is very similar to renting an apartment. You pay a down payment and agree to a fee and a lease term. Most car leases span between two and four years. Lease terms can vary significantly from person to person, but some standard terms include:
- You’ll be charged a per-mile fee if you exceed the maximum mileage per year
- If you return your vehicle with damage beyond “normal wear and tear,” you’ll be charged a fee
- You are legally obligated to maintain insurance coverage on the vehicle
At the end of your loan term, you’ll usually have the option to buy out your car. For example, let’s say you’ve been driving a $24,000 car and have paid $15,000 over three years. You might be able to pay the outstanding $9,000 and keep the car.
Pros of leasing
There are many benefits of leasing. First, unlike with buying a vehicle, you usually don’t have to pay a sizeable down payment.
Second, your monthly payments are smaller. Since you’re just leasing the vehicle, the dealership will offer you monthly payments that are lower than if you were to buy the car outright. The smaller monthly payments also mean you could afford to lease a vehicle that would be out of your price range to purchase.
Another benefit many drivers love is that you always get to drive a new (or newer) car. As soon as your car lease is up, you can lease another new vehicle. If appearances are important to your job—such as for a salesperson or Realtor—this is a fantastic benefit.
Additionally, always driving a newer car means you have fewer repair needs, and you don’t have to deal with the trouble of selling the car when you’re done with it.
Lastly, if you aren’t sure you’re going to continue to live in your city or state for the next several years, leasing can be more convenient. You won’t have to worry about taking your car across the state or selling it when you move.
Cons of leasing
Many personal finance gurus don’t believe in leasing cars. For example, financial expert Suze Orman warns people, “I personally think you should never, ever ever ever, lease a car, do you hear me? That’s because when you lease, you’re pouring in money each month with nothing to show for it at the end of the day.”
Suze Orman is, of course, referring to equity. When you buy a car, each payment gets you closer to owning the asset. If you wanted to sell your car, you could recoup some of your investment. This isn’t an option if you’re leasing. In fact, you’ll typically be charged hefty penalties for ending a lease early.
When you rent an apartment, you’re often limited in what you can do in your own home. For example, you might not be allowed to paint the walls or install new fixtures. Well, the same is true for a car lease. Your lease will come with restrictions, such as not going over a specific mileage per year.
If you were to go on a few road trips and exceed your allowed mileage, you’d be charged a fee. Most car leases only allow the owner to drive between 10,000 and 12,000 miles per year. After this, the driver may be charged between $0.10 and $0.25 per additional mile. So if you go over by 2,000 miles at $0.25, you’ll pay an extra $500.
Ultimately, leasing is usually more expensive in the long run. This is because you don’t build equity or own an asset, and you might pay many extra fees throughout the lease term.
What credit score do you need to lease a car?
You can likely get a lease with even a poor credit score. But your terms will probably be incredibly unfavorable. Most likely, you’ll be given a high interest rate or need to have a larger down payment with a poor score.
Ideally, when applying to lease a car, you’ll want a credit score in the Good range. For the FICO credit scoring model, a Good score starts at 670. According to Experian, the average car lease applicant in the second quarter of 2020 had a credit score of 718.
If your score is below 670, consider taking steps to improve it before applying for a car lease.
As another option, people with bad credit can opt for a lease transfer. A lease transfer is where you take over the remaining term of another person’s lease. The lender will still need to run a credit check and approve you, but the credit requirements are much more lenient for a lease transfer.
How does buying a car work?
Buying a car is a more well-known process. You can purchase a new or used car and it’ll be your property. If you buy from a private seller, you’ll probably have to buy your car in cash, all up front. Alternatively, if you purchase from a dealership, you can pay in cash or finance your purchase. Plus, if you buy a car from a dealership, you can sometimes trade in your current vehicle to reduce the price.
When you lease a car, there’s typically little room for negotiations. Luckily, you have a lot more leverage when you buy a car. You can negotiate a better price or loan terms based on your down payment, car trade-in and other factors.
When you finance your car purchase, your interest rate will depend significantly on your credit score, income, credit history and other factors. You’ll be approved for an interest rate and can usually choose how long you want your loan term to be.
You can choose to finance your purchase with the dealership or through a financial institution. It’s best to compare a few options so you can secure the best rate.
Pros of buying
The main benefit of buying your vehicle is that you own it. This means you can do whatever you want with the car, including driving as much mileage per year as you wish. And, if you’re going to sell your car, you can do so and potentially make money on your vehicle.
Lastly, buying a car is usually the cheaper option in the long run, so it’s the more financially sound choice for most people.
Cons of buying
Unfortunately, buying isn’t an option for everyone because it can be more expensive initially. You may need to have a larger down payment, afford higher monthly payments and potentially pay for more repairs over the years.
Additionally, most people know that a vehicle depreciates quickly. As soon as your new car drives off the lot, it loses value. However, you can offset the cost of depreciation by purchasing a used car instead.
What credit score do you need to buy a car?
The good news is that, even with bad credit, you should be able to buy a car. Like leasing a car, your credit score matters less for approval but more for your interest rate and loan terms. While someone with a deep subprime score (300 – 500) will get an average interest rate of 14.39 percent, those with a super prime score (781+) will get a rate of 3.65 percent for a new car.
That means having a poor credit score can result in an interest rate that’s up to four times higher than those of people with fantastic scores—ouch.
If you can improve your credit score before financing a vehicle purchase, you can save yourself thousands in interest.
Choose the option that’s best for you
When deciding between leasing and buying, consider things like how much you want to spend in the long run, how tied down you want to be and how comfortable you are with paying for repairs.
Consider what’s best for you, whether that’s leasing or buying. Whichever route you take, improving your credit before you look for a car can undoubtedly save you money. You can improve your credit by paying down debt, making payments on time and filing disputes for incorrect information on your credit reports.
