When someone says renting, you may think of a lease agreement. No wonder there’s confusion when it comes to the differences between car leasing and rent to own vehicles! They sound very similar – like they go hand in hand. We’re here to outline their differences, and how both work.
Leasing a Car vs. a Rent to Own Car
While renting and leasing are often used interchangeably or alongside one another, these terms have very different meanings when it comes to auto financing.
One of the main differences between a lease and a rent to own car is the dealership where it's offered. Leases are almost exclusively for new vehicles and available at traditional, franchised dealers. Rent to own cars are offered at dealerships with in-house financing, where the dealer is also the lender. Rent to own vehicles, also called lease to owns, are used cars.
How Leasing a Car Works
Traditional leasing is only available at franchised dealerships and is almost exclusively reserved for new vehicles. Typically, a lease’s monthly payments are more affordable than financing a new car with an auto loan, and leasing can be great for someone that wants to drive a brand-new vehicle every few years.
With a car lease, you pay the difference between the negotiated selling price and the value of the vehicle at the end of your lease term (also known as residual value). In other words, you’re paying only for that portion of the car you use while you’re driving it.
Once your lease is up, you return the vehicle to the dealer or leasing company. You don’t have any ownership rights to it since your name isn’t listed on the title. However, there’s usually the option to purchase the car at the end of the lease, while many leasing companies waive the termination fee if you turn it in for another leased vehicle. But you aren’t obligated to do either – you can simply pay any fees, turn it in, and walk away if you want. However, with a lease, you typically don’t gain any equity to put toward future purchases.
Keep in mind that new car leasing is generally only for borrowers with good to great credit scores. If your credit score is less than perfect, you may have issues getting approved for a new vehicle lease.
How Rent to Own Cars Work
With rent to own cars, you typically purchase the vehicle at the end of the rental agreement. The goal is to complete your rent payments so you can own the car. Similar to a traditional auto lease, your name isn’t listed on the title for the rent to own vehicle, unless you purchase it at the end of the rental period.
Only adding to the confusion, rent to own is sometimes called a lease to own. However, if you hear “to own” at the end, it's likely for a used car at an in-house financing or buy here pay here (BHPH) dealership.
Rent to own agreements are often offered at BHPH dealers that only have used vehicles. These dealerships generally don’t check a borrower’s credit score during the approval process, which makes these kinds of dealers very appealing to borrowers struggling to get financed by a traditional lender.
While BHPH dealerships don’t normally check credit scores, they also may not report your rental agreement to the credit reporting agencies, either. Even if you make every payment on time, your credit score may not improve. If you decide to look for a rent to own car, be sure to ask the dealer if they report rentals and payments to the major credit bureaus if you want to help your credit score.
Some BHPH dealerships may also allow the renter to back out of the rent to own agreement, unlike a traditional lease. But this means you forfeit your down payment, all rent payments, and gain nothing at the end of the rent to own contract.
Additionally, with a rent to own vehicle, you may be expected to make weekly or biweekly payments at the dealership. Renting also may be more expensive than simply financing a car, and it’s often a last resort option for bad credit borrowers who need a vehicle right away.
Financing a Car With Bad Credit
Car leasing is typically for those with good credit scores, while a rent to own car may not improve your credit score and is typically more expensive than financing one. If you want a reliable used vehicle and a way to help your poor credit score, financing through a lender that offers bad credit auto loans could be for you.
Bad credit lenders, also called subprime lenders, work through a dealership’s special finance department to help bad credit borrowers get financed for their next car. These lenders report auto loans to the credit bureaus, so you can improve your credit score for future car loans or leasing opportunities with on-time payments.
At Auto Credit Express, we have connections with dealers that have special finance departments. We match borrowers with all types of unique credit situations to these dealerships for free. To get started, simply complete our auto loan request form and we’ll look for a dealer in your local area.