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There's no shortage of choices to make when deciding what to drive. And once you've decided on a car, there's still the question of whether to finance it or lease it. If you're concerned about how this decision will factor into your credit report and scores, rest assured—their impact is the same. This means leasing a car can help you build your credit history just like a loan would.
That said, if you have bad credit, you may have a difficult time getting approved to lease a vehicle. Read on before you apply for a lease agreement.
How Leasing a Car Can Help You Build Credit
When you lease a car, you'll have fixed monthly payments for the duration of the lease agreement. As with an auto loan, the creditor will report your monthly payments to the credit reporting agencies, and the account will show up on your credit report as an installment account.
As long as your leasing company reports to all three credit bureaus—Experian, Equifax and TransUnion—and all your payments are made in a timely manner, an auto lease can certainly help to build or establish your credit history.
It can also hurt your credit, however, if you miss a payment for 30 days or longer, or you default on the lease agreement altogether. So as with a car loan, it's important to practice good credit habits, including making on-time payments.
Can You Lease a Car With Bad Credit?
Auto leasing companies generally look for consumers who have good credit or better, so it'll be challenging to lease a car with bad credit. You'll generally have a better chance of securing an auto loan, albeit with a high interest rate.
If you're dead set on leasing instead of buying, though, here are some things you could do to potentially improve your chances for approval:
- Make a down payment. If you're trying to make up for a poor credit score, a large down payment on a lease could show that you're serious about meeting the terms of the agreement. The upfront money also reduces the risk the lender takes on, making the arrangement more appealing.
- Consider a cosigner. If you can't get approved on your own and don't have enough cash for a down payment, consider asking a family member to cosign the lease with you. By cosigning, they agree to make payments if you can't, but you'll want to make sure it never comes to that to preserve your credit and your personal relationship.
- Improve your debt-to-income ratio. Your debt-to-income ratio (DTI), which is the percentage of your gross monthly income that goes toward your monthly debt obligations, is an important aspect leasing companies consider. By paying down other debts and reducing your DTI, you'll free up more cash flow, which makes it easier to make your monthly lease payments.
Things to Consider When Leasing a Vehicle
While the impact of buying or leasing a vehicle on your credit score is the same, there's still plenty to consider before you make a decision:
Unlike a traditional auto loan, the end of your lease payment period does not result in you taking ownership of the car; you'll have to return it to the dealership. You might have the option to keep the car, but you may end up paying more than if you had bought it in the first place.
Unless you buy your next vehicle outright, your options after returning your lease all result in more years of monthly payments. When you finance instead of lease, the car becomes yours at the end of the payment period. The money you were putting toward your car payment can then be used for other things instead, such as paying off other debts, paying your bills or building your savings account.
Leasing a vehicle can get you a lower monthly payment than financing a car. If what you want is a lower monthly payment on a brand-new car, leasing might be the smarter way to go—especially if it frees up money you can then put toward other debts.
As your lease ends, however, keep in mind that you may face additional charges at the end of the lease, such as mileage fees or fees to cover wear and tear on the vehicle (including any dents, dings, scratches and windshield cracks). Plus, during the lease term, you may be responsible for all of the maintenance costs, taxes and so on.
Restrictions on Use
Even though you don't technically own a financed vehicle until you pay off the loan, you're still free to make alterations to it and use it as you please. And since you won't be returning it to the dealership, you only have to worry about wear and tear with regard to how it affects the vehicle's condition and resale value.
With lease agreements, however, your agreement will be long and complicated, and you'll run into several limitations and restrictions that can cost you if you're not careful. For example, you may be expressly prohibited from making any changes to the vehicle, even if it's just to tint the windows. The dealership will likely expect the vehicle to be returned in essentially "showroom condition" and fees can follow if it's not.
You'll also likely have to deal with mileage limits, which means you'll need to be mindful of how you use your vehicle. If you go over your mileage limit, you'll be assessed a fee based on your overage.
Alternatives to Leasing a Car
If you have bad credit and can't qualify for a lease, you still may be able to qualify for an auto loan. Some lenders specialize in working with people with bad credit histories, and while the loans are expensive in terms of interest charges, it may be your best option to get back on the road.
Other options include:
- Lease transfers: A lease transfer allows you to take over someone else's existing lease instead of entering a new lease agreement. Leasing companies run a credit check before approving a transfer, but the credit requirements may not be as strict.
- Car-sharing services: If you don't drive often, you may be able to take advantage of car-sharing services, which allow you to rent vehicles on an hourly basis. Again, you can't escape a credit check with this option, but you likely won't face stiff criteria for approval.
- Vehicle subscription services: Like car-sharing services, vehicle subscription services allow you to pay to borrow a vehicle. The difference is that with this option, there's no definite rental period. You'll pay an upfront fee to gain access to a vehicle, then pay a monthly fee until you return it. You'll likely undergo a credit check, and there are income and driver's license requirements, but it can be easier than getting approved for a lease.
Work to Improve Your Credit for the Next Lease
If you have time before you need a new car or you simply want to improve your odds of getting approved for a lease in the future, take some steps to improve your credit score.
Start by monitoring your credit score regularly to understand where it stands and get updates on new accounts and inquiries. Also, check your credit report and look for areas that need to be addressed.
For example, it's important to get caught up on past-due payments, pay down credit card debt and avoid unnecessary credit applications. Also, consider asking a loved one to add you as an authorized user on their credit card account if it has a positive history.
As you take steps now to improve your credit, you'll be able to put yourself in a much better position to get approved for an auto lease the next time you're looking for a new car.