To build a good credit score, you need to take on credit you can comfortably handle. However, not every kind of credit can improve your credit score. Here’s the scoop on rent to own cars and possible credit repair.
Rent to Own Cars and Credit Building
Rent to own vehicles can be a good way to get into a car if you’re in a pinch or if your credit score isn’t up to snuff for traditional auto financing. However, long-term, it may not benefit you. If your payments don’t do anything to improve your credit, you may be stuck doing a rent to own deal when you need another vehicle.
Rent to own vehicles are used and they’re offered by dealers that offer in-house financing. In-house financing is just what it sounds like: the car buying and financing are both done at the dealership. Because all financing is handled by the dealer they often skip over the credit check.
As a good rule of thumb, a dealer that doesn’t review your credit reports isn’t likely to report the loan or your on-time payments to the credit bureaus. Without that positive reporting action, your credit score doesn’t improve by taking on the new credit.
It’s important to know that rent to own agreements isn't an auto loan or credit in the traditional sense. You’re not borrowing money from the dealership to buy the vehicle then paying them back.
You're paying the dealership to drive the rented car until you pay off what you owe.
The Key to Improving Your Credit
Your credit score is a three-digit number between 300 and 850 which is generated by the information on your credit reports. If there’s nothing on your credit reports, your credit score is likely in the low- to mid-range of the credit score spectrum.
The more positive information that's reported, like on-time payments and multiple lines of well-managed credit, the better the credit score you're likely to have. Late and missed payments have the opposite effect, and accounts in collections or loans that have been defaulted on can lower your credit score.
Almost every lender is likely to report (at the very least) your missed or late payments, but not every lender reports the loan itself or your timely payments. Dealerships that issue rent to own car agreements aren’t known to report on-time payments to the major credit bureaus.
To improve your credit score and bulk up your credit reports, you need to borrow credit that is reported to the credit bureaus. If you’re considering a rent to own vehicle and you want the agreement to improve your credit rating, ask the dealer about their reporting practices.
Not every in-house financing dealership is the same and many are independent mom-and-pop type shops. However, an in-house financing dealer is likely to report your missed/late payments, which stand to hurt your credit score. So making your rent to own car payments on-time doesn’t improve your credit, but it does avoid further damage.
How Rent to Own Cars Work
Once you make a certain amount of payments (either weekly or monthly), you have the option to officially purchase the vehicle and get your name on the title. While you’re renting the car, your name isn’t listed on the title, but you’re still responsible for maintaining the vehicle and carrying auto insurance the entire renting period.
For rent to own cars, the process may differ from dealer to dealer, but here’s what you can likely expect:
- Used cars only – Rent to own agreements are only for used vehicles. If you want a new car, but don’t want to take on a loan, consider auto leasing.
- No credit check – Most rent to own agreements don’t require a credit check because they're not a loan. If you have poor credit and serious delinquencies on your credit reports, in-house financing could be for you.
- It may be more expensive – Getting into a rent to own car may be more expensive than financing since the dealer is taking on more risk by skipping the credit check. Your car payments may also be weekly instead of monthly.
- Late fees – Rent to own agreements tend to carry hefty late fees.
- Down payment may be required – In-house financing dealerships typically require a down payment of up to 20% of the vehicle’s selling price to get approved.
Returning the vehicle – Since you’re not financing, you typically have the option to return the vehicle if you can no longer afford the payments. Backing out of a rent to own agreement tends to be easier than getting out of an auto loan. However, if you return the vehicle, you forfeit all of your previous payments.
Financing to Improve Your Credit Score
Auto financing through subprime lenders is another way that many bad credit borrowers get the car they need while building their credit histories at the same time. These lenders report their loans to the credit bureaus, so your timely payments boost your credit score for future purchases.
While subprime lenders do review your credit reports, bad credit isn’t a stranger to them. They often work with borrowers that have had a past vehicle repossession, gone through a bankruptcy, or just had some issues with maintaining a good credit history.
They’re signed up with special finance dealerships. You apply with the special finance manager, who sends it along to one or more of their subprime lenders. If you qualify for financing, you choose a car from the dealer’s lot that fits your maximum car payment approved by the lender. From there, you take delivery and start making payments to get on the path to credit repair.
Get In Touch With a Dealership
Here at Auto Credit Express, we know a thing or two about bad credit auto loans. We’ve been matching bad credit borrowers to dealerships that have the resources to help them get into a vehicle.
Begin by filling out our free auto loan request form. We’ll look for a dealer in your local area that’s signed up with subprime lenders. There’s never a cost or obligation to get matched to a dealer that knows how to help. Get started today!