Is Leasing a Car a Good Idea With Bad Credit?

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

, - July 21, 2020

When you have bad credit, getting credit for things you need can be difficult, like a vehicle. A car lease isn't impossible when you're struggling with poor credit, but they're certainly harder to come by. Let's take a look at bad credit leasing, and why you may want to focus on an affordable auto loan instead.

Leasing Difficulties for Poor Credit

Leasing is a process of paying to use a new vehicle for a few years. Think of it as an extended trial period; you get to drive a brand-new car for two or three years, and then once your lease is up, you can return the vehicle to the lender and walk away, purchase the car for a predetermined price, or turn in the leased vehicle and lease again.

This process isn't as easy for bad credit consumers because there aren't as many leasing companies that are willing to deal in poor credit. However, it's not impossible to lease with imperfect credit. What really makes leasing a challenge is the up-front costs associated with leasing. You also rarely gain any equity when you lease.

Perhaps the biggest reason leasing is difficult with bad credit is that you don't own the car without forking over more money. If you can't pay cash for the residual value of the vehicle, plus the associated tax, title, and license fees, you're likely to need a lease buyout loan. These typically come from banks, and you may not qualify if your credit hasn't improved enough since the start of your lease.

The Benefits and Drawbacks of Leasing a Car

Leasing has its benefits, too. Just because you have bad credit doesn't mean you should shy away from the idea completely. Lease cars are typically brand-new vehicles, so you're starting off the process by choosing a car with the latest safety and technology – all the bells and whistles associated with a new vehicle.

Though you're most likely going to be required to pay a security deposit up front if you have a lower credit score, it's refundable if everything is shipshape upon returning the car. You're not usually required to make a down payment (called a capitalized cost reduction in leasing), but if you choose to do so, you're only prepaying some of your lease.

Additionally, taxes and interest are rolled into your monthly payment, so you usually don't have to worry about putting those down up front in addition to your security deposit.

Leased vehicles typically have a lower monthly payment than an auto loan. However, with bad credit you're likely to qualify for a higher interest rate than someone with a better credit score. This increase can cut down on how much you may have saved if you financed the car.

Further taking away from potential savings of a lease, you have to worry about the vehicle’s mileage and condition when you turn it in. Leases come with built-in mileage caps, typically around 10,000 to 12,000 miles a year, which means driving a lot can take its toll. If you return a lease car over mileage, expect to pay around 25 cents per mile over your limit. The condition of the vehicle also needs to be as clean as possible, both mechanically and on the interior. Any wear and tear the lessor thinks is "excessive" is going to cost you, too. This money can come out of your security deposit and/or your pocket.

When all is said and done, you're typically left trying to decide what to do at lease turn-in time. Since most lease cars don't have equity when you turn them in, you can't use it as a down payment the way you can if you own a vehicle with equity. So, if you decide to buy or lease again, you're basically starting the process over again.

Choosing a Bad Credit Auto Loan

If you decide that leasing isn't likely to save you enough cash, you can still opt to finance a car with a bad credit auto loan. When you do this, you work with a lender that's prepared to look beyond your credit score, and instead base their lending decisions on your ability, stability, and willingness to take on a car loan.

Lenders that assist many different credit-challenged borrowers are called subprime lenders. These lenders can be found at special finance dealerships all across the country.

Once you find a special finance dealership, you typically need to provide documentation and meet certain stipulations in order to qualify for lending. These qualifications are what allow subprime lenders to say yes, when other traditional lenders are more likely to turn you down.

Subprime auto loans also give you the ability to help you improve your credit, while allowing you to drive the vehicle you need. When you go through the right lender, you may even qualify for an affordable new car, but used vehicles and certified pre-owned cars are usually options, too.

Plus, when you're done paying off your auto loan, the vehicle is yours to keep, and any value it has can be turned into a down payment when it's time to get your next loan!

Take the Next Step

Whether or not leasing your next car is a good idea is up to you. But, if you decide you want to go for an auto loan, CarsDirect is here to help you take the next step. Instead of spending hours on phone calls and online searches, combing through every dealership you come across, trust us with taking care of you from the start.

You can research vehicles in our new and used car pages, find out what your potential auto loan budget can be with our Car Loan Calculator, and get matched with a local dealer that's signed up with subprime lenders, all right here on CarsDirect. When you're ready to get connected to a dealership, simply fill out our fast and free auto loan request form, and we'll get to work for you!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

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