Some dealers advertise lease-to-own programs, and these programs shouldn't be confused with traditional car leasing. Even though the word "lease" is used to describe the arrangement, if you lease-to-own your vehicle, you're not actually leasing.
When you look at these two options side by side, it is clear that they aren't even similar. Leasing and leasing-to-own involve different types of contracts, different vehicle options, and also target different types of customers.
Lease-to-Own Programs and Bad Credit
Sometimes called rent-to-own programs, lease-to-own agreements are usually promoted to car buyers with credit issues. This is because most of the dealers who offer this option do in-house lending. This means that they don't use third-party lenders. Because of this, they don't have to run a credit check on a customer in order to finance them.
On the other hand, conventional leasing usually requires an applicant to have reasonably good credit. It may be possible for someone with bad credit to qualify, but it's much harder. Also, lessees with less than perfect credit typically won't be offered the lowest promotional rates.
Leasing-to-Own Means Buying the Car
Using the term "lease-to-own" to describe the actual process is somewhat deceptive. While the dealer holds the car's title while you're making payments, the goal is for you to eventually own the car. If you make all of the payments outlined in the agreement, you end up purchasing the vehicle. Unlike a traditional lease, you can back out of the contract if you want, but all of your prior payments are forfeit.
However, if you lease a car, it is understood that the vehicle will go back to the dealer or leasing company when the contract expires. Meaning, none of your lease payments actually go toward buying the car. Of course, you can opt to purchase the leased vehicle instead of returning it. But this requires a separate negotiation, and it is never just assumed that you will take this option.
Leasing vs. Lease-to-Own: What Cars to Expect
If you go to a lease-to-own/rent-to-own lot, you're most likely to be presented with used car options. Often, these vehicles are older models with a fair amount of mileage. There's also a good chance that you could end up paying much more than your car is worth by the time your contract is completed.
Leased vehicles, however, are almost always new. This actually goes back to one of the main reasons that some consumers choose leasing over buying. New cars depreciate rapidly in the first few years. So, if you lease a new vehicle, you pay for the part of the car that you're using. Basically, your payments cover the value that's lost, plus interest, while the vehicle is in your possession.
For those who are okay with always having a car payment in order to always have a new vehicle to drive, leasing might be a good option. Just remember that most of the time, your credit needs to be in good to excellent shape in order to qualify.
On the opposite side, for car buyers with severe credit issues, a lease-to-own program is an okay last-resort option. Just keep in mind that it isn't a cheap option and that you might be expected to make either bi-weekly or even weekly payments – typically at the dealership. Also, most lease-to-own dealers don't report loans or payments to the credit bureaus. So, buying a vehicle this way doesn't help your credit score.
Improving Your Credit with a Bad Credit Car Loan
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