Leasing or Financing? Finding a Good Fit for You

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Even with poor 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.


, - February 11, 2020

If it's time for your next car, you may be wondering if leasing or financing is better. Both options can be a good choice for many reasons, but in order to understand which one is right for you, you have to weigh the pros and cons for your situation.

Leasing a Car with Poor Credit

When it comes to getting a car as a credit-challenged consumer, leasing and financing may both seem like a good idea, but leasing isn't always a practical choice for bad credit borrowers. Many leasing companies are reluctant to work with people that have poor credit, and those that do often require additional money up front, and charge a higher interest rate than they do for consumers with good to excellent credit.

Not only is it more difficult to lease when you have credit challenges, you don't benefit from equity in the vehicle, and you never actually become a car owner. This means that if something unforeseen happens, you may end up without a vehicle, and without the money to buy another car.

Let's look at the pros and cons of leasing a vehicle:

Leasing benefits:

  • Lower monthly payment – Your monthly payment is typically lower in leasing because you're not paying for the whole car. You're only paying for that portion of the vehicle you use.
  • Chance to drive a new car – Lease vehicle are usually new cars, which gives you the opportunity to drive the latest models with the newest features.
  • No required down payment – Called a capitalized cost reduction in leasing, a down payment doesn't save you money over the course of a lease like it does in a loan. This is because it doesn't change the amount you're borrowing, it only prepays the lease. Leases typically don't require a down payment, but a lessor may ask a borrower with bad credit to provide one. Not to mention, they may also ask for one or more security deposits – which is a separate thing from a down payment – if you're leasing with poor credit.
  • Included warranty – Manufacturer-backed warranties usually cover the entire lease term, which can save you money on repairs.

Drawbacks to leasing:

  • Up-front charges – When you begin a lease, you're typically required to pay the first month's payment, an acquisition fee, a dealer documentation fee, and license and title fees up front. If you have bad credit, you may also be required to pay a down payment and one or more security deposits.
  • Early termination fees – If you decide leasing isn't for you and want to get out of your lease, you usually have to pay an early termination fee and your remaining lease payments.
  • No ownership – When you're done with your lease, you have to turn in the vehicle, unless you choose to buy it. If you turn it in, you have to lease again or find something to buy if you still need a car.
  • Insurance costs more – Typically, the insurance coverage necessary for leasing requires you to have higher limits than financing, which means you pay higher monthly premiums.
  • Mileage limitation – All leases come with a built-in mileage cap, usually around 10,000 or 12,000 miles a year. If you're over mileage at turn-in time, you can expect to be charged for the excess miles, typically around 25 cents per mile. You can buy extra mileage for less at the beginning of a lease, but if you don't use them, you're not getting any money back.
  • Car condition – You have to take good care of a leased vehicle because it has to be returned in good condition. If there's any damage that's considered above "normal wear and tear" you're going to have to pay for it.

Car Loans Are a Better Option with Bad Credit

Financing a car comes with its own pros and cons, too. However, getting an auto loan may be easier than financing when you're struggling with your credit situation. This is because there's a specific type of lender available for people with less than perfect credit to get the financing they need: subprime lenders. These lenders use factors other than just your credit score to approve you for a car loan.

Financing may also be a better option because once you're done paying the loan, the vehicle is yours. This means you can do as you please with the car, and you can use or keep any money that comes from the vehicle's equity however you see fit.

Additionally, there are no mileage caps or charges for wear and tear when you trade in the car. Plus, you're free to trade in the vehicle whenever you want with no early termination fees.

On the downside, auto financing with poor credit is likely to mean a higher interest rate, a higher monthly payment, and a required down payment. The down payment can actually help you combat the increased interest charges by lowering the amount you borrow. You can also reduce the interest charges by opting for an affordable car, and choosing the shortest loan term you can afford.

Decided Which Is Right for You?

Once you've decided on whether leasing or buying is the right choice for you, it's time to find your next vehicle. Let CarsDirect help you find a local dealership that has the financing options you're looking for.

We work with a large network of special finance dealers that have lending options ready to help people in unique credit situations. Get started right now by filling out our easy and free auto loan request form.

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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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