You are considering leasing a car, but there are a few bugs in your credit score that make you worried that you may not qualify. This is reasonable because credit scores affect all borrowing. Ultimately, while you can find a lender willing to work with you, be prepared to spend more than someone with exceptional credit.
People choose leasing over buying a car for lower out-of-pocket costs (think smaller down payments) and more manageable monthly payments. If you’re struggling with bad credit and still want to lease a vehicle, expect additional fees, higher interest charges, and larger monthly payments. Here’s what you need to know:
Key points to remember
- Leasing a car with bad credit is possible, although some dealerships may not approve you.
- You may need to make a larger down payment, make larger monthly payments, and be hit with a higher ‘money factor’ (see below).
- You can try workarounds like leasing a used vehicle or taking over someone’s lease.
Rent a car with bad credit
When you rent a car, you rent it for a period of time with a set number of miles allocated. Leasing is less popular than buying: About a quarter of new cars were leased in Q4 2020, according to Experian. When looking to lease a car, the dealership will perform a credit check to make sure you are creditworthy. Dealers and lenders offer the best deals to customers with the best credit scores.
While there is no credit limit for renting a car, “typically a score between 670 and 739 is required,” says Jacob Dayan, CEO and co-founder of Community Tax and Finance Pal. “A credit score of less than 670 can be more difficult to secure a lease, but if you do, the down payment and monthly rate will be much higher,” says Dayan.
Things to consider before renting a car if you have bad credit
When you buy a vehicle, you assume its depreciation: the value of the car decreases as it ages. But when you rent a car, the lender takes care of the depreciation of the car, which takes this into account in the rental terms.
Now back to the term mentioned above: monetary factor. Unlike the annual percentage rate charged when you buy a vehicle, your lease factor, aka monetary factor or lease rate, is the rate you pay when you lease a vehicle, similar to the interest rate when you buy a car. Your lease terms are determined using this monetary factor, which is based on your credit score, the price of the car, and the so-called residual value of the car. This is the estimated value of the car at finish of the lease.
What you need to remember is that the car price and the money factor are negotiable, while the residual value is preset. Credit scores above 729, the average tenant credit score in the Experian report, will qualify for the lowest monetary factor – the best rate – while scores below 700 will receive the highest financial factors, or the least preferred rates.
The best deals on a lease include a low lease price, high residual value, and low monetary factor. Without the low monetary factor, you will likely pay a lot more than someone with a better credit rating.
What to do to get a lease approved if you have bad credit
- A large down payment on a lease can help.
- A trade-in can offset some upfront risk, making you a little more attractive to the lender as you’ll add more money to your rental.
- Consider buying a cheaper model, rather than your first choice.
- A parent or family member with good credit can help if they are willing to co-sign the lease.
- Companies like LeaseTrader may be able to match you with someone who needs to get out of their lease. Taking over another person’s lease always requires a credit check to be eligible. However, the conditions and the monetary factor may be more favorable and a large down payment may not be necessary.
- Look for a dealership that leases used vehicles. One caveat: While you may find savings on down payments, cash factor, or monthly payments, watch out for “rent here, pay here” dealers who focus on people with bad credit. These transactions are typically funded by the concessionaire rather than an outside lender and come with a large down payment, adverse terms, and higher monthly or bi-monthly payments. You will also have less to choose from newer models, as they are generally smaller and you may be responsible for repairs. Carefully read the contracts at all rental-here-pay-here locations and consider them as a last resort.
What else can you do?
If you’ve been turned down for a lease, or have been offered a lease with a large down payment, high cash factor, and monthly payment, consider a few alternatives:
- Buy a cheaper used vehicle with cash or try to get better terms to finance a car rather than leasing one.
- Work with a credit union or dealership that specializes in leases for people with less than stellar credit.
In the meantime, take immediate action to repair your credit score. “Make on-time payments every month on all of your balances, and if you can’t afford to pay them off in full, pay as much over the minimum as you can afford,” says Nathan Grant, Senior Industry Analyst of credit at Credit Card Insider.
Also, avoid maxing out your credit cards and work on lowering your debt ratio. A good debt to credit ratio is 30% or less. If you have $ 7,000 of available credit, for example, and you’re using $ 5,000, your debt-to-income ratio (71%) is way too high, keeping your credit scores low.
The bottom line
You can rent a car with bad credit, but you may need to look for a good deal. You will likely have a larger down payment, larger monthly payments, and you could receive an unfavorable rental rate if approved. If you get a co-signer, take over someone’s lease, or lease a used vehicle, you can save money.
Otherwise, wait until your credit is in better shape to get a better lease, or if you can’t wait, try buying an older model of car rather than leasing a newer one.