Leasing a car isn't impossible when you have bad credit, but it's not the easiest process either. If you're not sure where to start your journey toward a lease vehicle, let us point the way.
4 Leasing Basics
Firstly, leasing is a whole different process from financing an auto loan. Sure, there are some similarities, such as how you choose your car, negotiating your contract, and needing full coverage auto insurance, but that's about where they end.
Leasing a vehicle means that you never actually own the car unless you purchase it at the end. Leased vehicles are typically only new, which means that they may start at a higher price than cars you could finance with a loan. But, since you never actually own the vehicle, you're only paying for the time you have it.
Here are four basic leasing terms you need to know:
- Capitalized cost – Also called the cap cost, this equates to the purchase price of a car in a loan. It's the cost of the depreciation plus taxes and fees that make up the cost of your lease. This is a precalculated price which you work to pay over your lease term, which is typically 24 to 36 months.
- Cap cost reduction – This is similar to a down payment in a loan, however, it's not a requirement for leasing. If you use a cap cost reduction, you save money on your monthly payment, but it doesn't decrease the overall cost of the lease. All you're doing when you use a cap cost reduction is prepaying the lease.
- Residual value – This is the value of the vehicle at lease turn-in time. Residual value is set at the start of the lease. If your lease is calculated correctly, and there haven't been any major changes to increase or reduce the car's value, the residual value should be equal to the equity.
- Money factor – This is comparable to the interest rate of a loan. It's expressed as a decimal number, 0.0024 for example. To see what this would equal as an APR, multiple the decimal by 2,400. In this case a lease with a money factor of 0.0024 is equivalent to having a 5.76% interest rate. The money factor is also sometimes referred to as the lease factor or lease fee.
Now that you know the basic lease terminology, let's look at why bad credit leasing can be difficult.
Difficulties of Leasing a Car With Bad Credit
Even though leasing a car may seem like a better deal than an auto loan on the surface, this isn't always the case. It's true that leased vehicles typically carry a lower monthly payment than their car loan counterparts. If you always want to drive a new vehicle, or need to have the latest bells and whistles in your car, leasing could also be appealing.
However, because they're new vehicles, the starting price is often higher than it would be on other cars, such as used or certified pre-owned vehicles. If you're leasing a car for 36 months which is more expensive than one you could buy with a loan in 60 months, you're probably not saving too much cash by having a lower monthly payment.
Additionally, since a lease approval is typically based on your credit score, a credit-challenged consumer may not be able to find a lessor willing to work with them. When you're struggling with credit issues, you may have trouble getting credit for many things. Available credit, as well as overall financial stability, are big factors in leasing.
And, when your lease is up, you either have to start the process over and lease again or purchase the vehicle for its precalculated residual value. Then, there are the extra costs associated with leasing that may tip the scales out of favor with bad credit borrowers.
This is because lease cars aren't yours to keep, so they have strict rules imposed on them while you're using them.
The Extra Costs of Leasing
Any condition that doesn't meet the lessor's standards when you return the vehicle has to be paid for out of your pocket unless you plan to buy the car. Either way, it's more money that you may not be prepared to spend. These could include over mileage charges, wear and tear fees, and cleaning costs.
All leased vehicles have mileage limits, and if you drive more than your allotted miles you usually pay around 25 cents or more per extra mile. You can purchase extra miles at a lower cost up front, but there’s no refund if you don't end up using them.
Your car also has to be kept in as good of condition as possible – any wear and tear to the vehicle that's considered excessive by the lessor could incur a charge. You also have to keep the car clean inside, and can't make any modifications to its original equipment while you have it.
If something happens to the vehicle that isn't covered under warranty, you may also be responsible for the repair bills of any issues that you were unable, or unwilling, to fix. Leased cars also generally carry a higher auto insurance deductible than vehicles with a loan, which could increase the cost of your insurance significantly.
Lastly, there are many fees associated with leasing that you may not have to worry about in a car loan, such as an inception fee, security deposit, and early termination fees. In fact, it may not be possible to get out of a lease early without paying the entire cost of the lease.
Auto Loans and Bad Credit
Though an auto loan may not be what you set out to find, they can be much easier to achieve with poor credit. There are lenders that work specifically with credit-challenged consumers, called subprime lenders. They're found through special finance dealerships and use more than just your credit score to get you approved for financing.
With a car loan through a subprime lender, you have the chance to get the vehicle you need, and there's no going back to turn in the car once the term is over – you own it! Other advantages include keeping the vehicle in whatever condition you choose. These include being able to put as many miles on it as you want, the ability to customize your car, and possibly big savings on auto insurance over leasing.
Perhaps one of the biggest advantages to a car loan over a lease is that you have a better chance at getting a loan. Subprime loans can help you build credit with each on-time payment, and if you have enough of a credit score boost by the end, you can set yourself up to be in a position to lease the next time around.
Ready to Get Started?
If you're dealing with bad credit and need a vehicle, getting an auto loan is a great way to improve your credit and get the car you're searching for. Looking for the special finance dealer that has the lenders you need can be hard, though, especially if you aren't sure where to start. Not all dealerships have the resources to assist people who have damaged credit.
At Auto Credit Express, we know where to find the dealers you're looking for and have been connecting borrowers to lending opportunities for over 20 years. Why drive around town looking for the right place, when you could start right here? Simply fill out our quick auto loan request form, and we'll work to match you to a local dealership. The process is free and there's never any obligation, so get started now!
