How To: Leasing A Car With Bad Credit 101

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You see a television, radio or online spot touting a low car payment and low “annual percentage rate”. Attracted by the prospect of getting to drive for a low payment, you shop and then start to fill out papers to make the lease happen.

The sales or finance manager reveals to you that you don’t qualify for that prime offer because your credit is in poor shape.

Thus, if you want to lease, you might find it more costly than you hoped. In some cases, your credit may be so disheveled as to keep you from leasing.

Quick NavigationWhats The Meaning Of Bad Credit To A DealerHow Dealers Interpret The ScoresMake Sure The Score Is ReliableGet The Record Straight How The Score Factors Into The PaymentHow A Lease WorksA car lease involves many elements on a car loan, though a different cadence is employed:Treat! See This Sample Illustration Tips: Keeping the Payments Down Even With Bad CreditBut… What If I Don’t Qualify?Get A Co-signer:The co-signer needs to understand and be able to undertake the responsibilities of the lease contract. Before you enlist someone:Lease Assumption: Working To Drive or LeaseLast, (But Not Least) Go To The Lot Prepared

Related: What Are The Advantages Of Leasing A Car Instead Of Buying One?

Whats The Meaning Of Bad Credit To A Dealer

Your credit score helps the dealer or finance company judge your creditworthiness and the likelihood you’ll fail to make your lease payments.

Generally, these grades are furnished by FICO, which stands for Fair Isaac Corporation. FICO computes your score based:

  • Payment history, specifically whether you pay on-time
  • Credit utilization, which is the ratio of what you owe on credit cards to your credit limit
  • The length of your credit history, such as how long you have kept accounts open
  • New Credit
  • Credit mix, which refers to the types of accounts, such as mortgages, credit cards and car loans

* FICO scores span from 300 to 850

Related: Can You Lease A Car with Bad Credit and No Money Down?

 

How Dealers Interpret The Scores

As a rule of thumb, you need a score of 700 to 740 (depending on the dealer) to qualify for one of the upper-tier leases. These high-level deals afford you access to the interest and payment terms that you see in the advertisement.

As your score lowers, you still might qualify for a lease, but you’ll have higher rates and payments.

At scores below 579, you’re considered a poor credit risk. Reasons may include one or more outstanding judgments or a bankruptcy or little or no credit history.

According to FICO, roughly six in 10 customers who score under 579 are likely to default on an obligation in the future.

Related: How To Lease A Car With No Credit

Make Sure The Score Is Reliable

As a rule of thumb, you need a score of 700 to 740 (depending on the dealer) to qualify for one of the upper-tier leases. These high-level deals afford you access to the interest and payment terms that you see in the advertisement.

As your score lowers, you still might qualify for a lease, but you’ll have higher rates and payments.

At scores below 579, you’re considered a poor credit risk. Reasons may include one or more outstanding judgments or a bankruptcy or little or no credit history. According to FICO, roughly six in 10 customers who score under 579 are likely to default on an obligation in the future.

 

Get The Record Straight 

Dispute, in writing, any mistakes you see.

Specify the information you believe is wrong and why you contend it’s wrong. Include any documents that support your belief and request that the agencies remove the erroneous information.

Send your dispute and supporting papers to the credit reporting agencies and to the company or organization that furnished it.

If a judgment was entered against you, but you paid it off or the creditor accepted less than the amount as settlement, make sure the judgment is marked cancelled by the court that entered it.

Although the fact that the judgment was entered can stay on your report for up to seven years after it was entered, you can request that the agencies update your report to reflect you have paid it

How The Score Factors Into The Payment

Assuming that your report and score correctly reveal your poor credit, you’re not necessarily shut out of leasing.

However, rather than being in an upper tier lease, you’ll face a higher interest rate with translates to a greater monthly lease payment.

To see this, you need to understand the fundamentals of a lease and how payments are calculated

 

How A Lease Works

Think of a car lease as a method of financing. Strictly speaking, you’re not borrowing money because you’re not actually buying the car. When you purchase a car, you have a price, often negotiated rather than sticker.

Think of a car lease as a method of financing. Strictly speaking, you’re not borrowing money because you’re not actually buying the car.

When you purchase a car, you have a price, often negotiated rather than sticker. You typically make a down payment or offer a trade-in (or both).

The balance of the price becomes the amount you finance through a car loan. The annual percentage rate (APR) is applied to the loan amount to help set the monthly payment.

A car lease involves many elements on a car loan, though a different cadence is employed:

Capitalized Cost

This refers to the amount you “finance” and is based, at least initially, upon the manufacturer’s suggested retail price (MSRP). As with the price of a car you buy, you can negotiate the capitalized cost down from the MSRP. Also, a down-payment or trade-in can reduce the capitalized cost.

Lease Factor Or Lease Fee

This functions as the interest rate, or annual percentage rate. You calculate this factor by dividing the annual percentage rate by 2,400.

Residual Value

This refers to car’s value at the end of the lease. You see this element in lease, but not loan, because you don’t own the car in a lease. The dealership owns it. You’re paying the dealer for the anticipated depreciation, or loss of value, while you possess it.

As a general rule, the retained value is 45 to 60 percent of the capitalized cost. The difference between the capitalized cost and retained value represents the value of the car that you use.

Treat! See This Sample Illustration 

Suppose you have a car with a MSRP of $20,000, but you negotiate the capitalized cost down to $18,000. You lease for 36 months and you’re capped at 15,000 miles per year.

Assuming the retained value is 57 percent of the MSRP:

Baseline Lease Payment

(1) Determine the retained value by multiplying 57 percent by the MSRP, not the negotiated capitalized cost. $20,000 x 0.57= $11,400.

(2) Calculate the difference between the “capitalized cost” and retained value. $18,000-$11,400=$6,600

(3)Divide $6,660.00 by 36 months (for a three-year lease). $6,600/36= $183.33

Adding The Interest

(1)Determine the lease factor. For a 3 percent rate, divide 3 by 2,400. 3/2,400=0.00125

For an 8 percent rate, divide 8 by 2,400. 8/2400=0.00333

(2)Add the negotiated price and residual value and divide the sum by the lease factor:

(18,000+11,400) x 0.00125 (for 3 percent interest)=$36.75

(18,000+11,400) x 0.00333 (for 8 percent interest)=$97.90

(3)For the Monthly Payment:

Base Payment + Lease Fee

183.33+36.75=$220.08 (for 3 percent interest)

183.33+97.90=$281.13 (for 8 percent interest)

 

In this example, a lower credit score adds $61.15 to the monthly payment.

 

Tips: Keeping the Payments Down Even With Bad Credit

Here are some tips to keep down the monthly payments:

Lower Your Sights

The higher-end dream car might have to wait while you rebuilt your credit. Opt for a vehicle with a lower capitalized cost. You might have to consider the pre-owned or used car portion of the lot. If you go with a pre-owned car, you might have a limited or shorter-term vehicle warranty than if you lease a new one.

Reducing the Capitalized Cost

Apply a trade-in or money stacked away for a down payment to lower the capitalized cost, or what you’re effectively financing.

Some dealers may insist on a down payment if you have poor credit or you won’t qualify on your own for a lease.

Lower the Mileage

Your basic lease payment assumes that you don’t exceed a given number of miles per year. Dealers can offer you lower monthly payments by lower-mileage leases, such as 10,000 per year.

The mileage limit means that you pay extra either at the end of the year or at the end of the lease when you go over.

For example, if the dealer charges 10 cents per mile over the limit and you drive 15,000 miles in a year, you’ll be charged an extra $500.

Consider your driving habits and destinations in choosing the mileage cap. If you stay mostly in town, a lease such as 10,000 miles may seem realistic. For those who travel extensively while working, such as sales representatives or inspectors, you might need a higher limit.

But… What If I Don’t Qualify?

Get A Co-signer:

 A dealer or its finance company can look to both you and the co-signer to perform under the lease agreement. If you miss payments, both the co-signer and you are responsible for becoming current. If you don’t, the finance company can report the negative information on both of your credit reports and take both of you to court.

In fact, depending on the lease contract, the finance company doesn’t have to collect from you first before turning its efforts to your co-signer.

The co-signer needs to understand and be able to undertake the responsibilities of the lease contract. Before you enlist someone:

  • Read and understand the lease contract for yourself.
  • Allow the would-be co-signer to read and learn what the lease contract requires of him or her and you
  • Make sure the co-signer understands that she can be held liable if you miss payments.
  • Determine if the co-signer can financially take on the role. You should know whether the co-signer is employed or has obligations such as child support, loan payments or credit card. Also, avoid someone who moves or changes jobs frequently, as this might suggest an absence of financial stability.

The dealer will likely run a credit check on your proposed co-signer. As a rule of thumb, your co-signer should have a credit score of at least 700 to 750, depending on the dealer or its finance company.

Related: Can You Lease A Car With A Cosigner

Lease Assumption: 

In a lease assumption,  you take over a vehicle and its lease payments from the vehicle’s present user. Otherwise known as lease transfer, this approach allows a consumer to get out of a lease without facing early termination fees. You in return get a car in which you don’t have to pay for a full term.

Lease transfers are usually still subject to credit approval.

However, the dealer or finance company likely will relax its standards if you’re assuming an existing lease rather than leasing from the beginning. This is because, by the time you assume the lease, there has already been a down payment on the car and the dealer has received payments.

Normally, you won’t have to make a deposit, which means that you can devote your money to the lease payments.

Online lease transfer sites can match you with someone who wants or needs out of a lease.

Working To Drive or Lease (Not The Best Option)

Some companies or, especially, advertising agencies might need drivers for cars that work effectively as moving billboards. If you can land one, you get a free car in exchange for your time in driving around to advertise a business.

If you drive for an advertiser, you get use of the car generally as if you owned or leased.

You can’t remove the advertising, regardless where you drive the car. Also, insurance on the car is generally your responsibility.

Companies may also employ drivers and lease to them cars to taxi customers to various destinations. These drivers also can make personal use of these cars. Lease payments come out of what the drivers earn from their taxi services

Related: Short Term Lease- Can You Lease A Car For 1 Year?

Last, (But Not Least) Go To The Lot Prepared

Instead of experiencing surprise and disappointment, prepare yourself for the lease terms for which you’ll qualify and what you can afford. Before you arrive at the car lot, pull your credit report and get your credit score. If it doesn’t appear on a credit card or other statement you have, you can order it from MyFico.com.

Once you gauge where you stand, then you can shop for cars in your price, or capitalized cost, range and the payments you can afford.

If you can’t lease because of your credit, consider using savings for an inexpensive used car or try to build your credit before you buy or lease.

Bonus: Buying vs Leasing A Car

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