When you lease a car, you don’t own it unless you buy it at the end of the term. Because a leased vehicle’s actual cash value doesn’t equal the residual value until the end of a lease term, having a leased car with equity is quite rare. However, it is possible in some cases, and we can explain how this can happen.
How Lease Payments and Equity Are Determined
Lease payments are based on two components: the money factor (what the interest rate is called in a lease), and the amount of depreciation, which is the difference between the capitalized cost and the residual value determined by the leasing company at the beginning of the lease.
Lease payments are typically lower than financing payments because you only pay for the portion of the vehicle's value between the capitalized cost and residual value when you lease.
Since leases are designed so that the only time a car's value equals the balance owed is at the end of the lease, it’s not common for there to be equity at the end of the lease term. However, if a vehicle’s actual cash value at the end of the lease is higher than the lessor's estimated value (the residual value) written into the lease, the car’s higher trade-in value could result in lease equity.
To know how much a vehicle is worth, you need to have it appraised by a dealer. Once you have an actual cash value, you can compare it to the residual value and determine if there’s equity. If there is, you could buy the car for its residual value (which is a bargain), and either keep driving it or sell it and make a profit.
Can I Lease a Car with Bad Credit?
If you have bad credit, can you lease at all? Just like equity in a leased vehicle, it’s uncommon but not impossible. Leases are priced by tiers – the lower your credit score, the lower the tier you qualify for. If your credit score is too low, you probably aren’t going to qualify for a lease at all.
If you qualify for a lease and your credit is low, you can expect these two things to occur:
- You may have to make one – or more – security deposits up front in addition to the first month’s payment. Not to be confused with a down payment, a security deposit is something you get back at the end of the lease term if the car is within the mileage limitations and has no major issues that the lessor needs to address.
- Just like financing, you're probably only going to be able to qualify for a higher than average interest rate, or money factor. What interest rates are available to you can vary by lessor.
In addition, you may need to provide proof of income, residence, and phone, and have a list of five or more personal references if you have poor credit. You can read more about qualifying for a lease with bad credit here if you’re still unsure.
The Bottom Line
Typically, leased cars aren't worth more than their residual value at the end of a lease term. However, consumers nearing the end of their lease should check their vehicle's value before turning it in. Otherwise, they might be leaving money on the table.
If you’re looking to lease or finance your next car but don’t know where to turn due to bad credit, we want to help. Auto Credit Express works with a nationwide network of dealerships that have the lending resources available to help borrowers with less than perfect credit.
Let us guide you toward a local dealer! Get started by filling out our free online auto loan request form today.