Buying a car is more costly than leasing it. However, if you have bad credit scores, you may not have the luxury to choose. If you are shopping for a loan with poor credit, your options become very thin. You will not have access to the standard bank installments and most of the credit cards as well. The decision then, between buying or leasing a car becomes a serious one. Which one should you take? Buying or leasing? Let us look at what each road leads to and what is required.
What is the difference between leasing and buying a car?
Buying and leasing a car: What it means?
Buying and leasing a car is practically the same situation as buying a house and renting it. When you buy the car, it becomes your property. When you lease it, however, you only rent it from the real owners of the car.
Buying a car usually involves taking an auto loan, unless you have saved enough to buy it outright. When you take the auto loan, you will be expected to make monthly payments, plus you will be in charge of the maintenance of the car and other repairs. Once the auto loan is completed, paid off, the car is now fully yours.
On the other hand, leasing involves signing a contract with the car dealership. They will require you to make monthly payments plus some additional fees, and in turn, you will rent the car for the speculated amount of time — usually two to three years.
This leasing option comes with some restrictions. Since the car is not yours, you cannot do as you please. There are some limitations on how you can use the car, for example, how many miles you are allowed to drive every year. There are also other restrictions involving car damages. In fact, they will charge you additional fees if the car is damaged.
The options of either buying or leasing a car both have benefits and drawbacks. Buying a car earns you a personal asset even though it is very expensive. Leasing a car spares you from the worries of maintaining an old vehicle since you can always switch to new cars when your lease expires. But what of people with poor credit? How does this affect their choices? Let us find out.
How poor credit affects leasing and buying?
The choice between leasing and buying with bad credit
Poor credit scores will make both options of either buying or leasing very difficult. You are probably looking at steep high-interest rates or your loan or lease application getting rejected.
Your low credit score is basically a red flag telling lenders such as car dealerships that you are not reliable when it comes to paying people their money. This means lending you money will be a greater risk than normal. Dealerships do not like risks, and in order to protect themselves from potential losses, they will charge people with bad credit more.
Getting unsecured personal loans with poor credit is practically impossible. The risk a lender will be looking at is too great. In case you default, the lender will not have any means to recoup their losses, apart from taking you to collections. Your loan application will be denied unless you are taking a cash advance or a bad credit loan.
With auto loans, there is hope. The difference is that auto loans use the vehicle you are buying as collateral. That is, if the loan is not paid back, the dealership can repossess the vehicle and recoup their losses by selling it. This changes everything. Even with bad credits, the risk is not that high anymore. The lender has some collateral and, therefore, more likely to accept to loan you. However, when they do loan you, you will pay premium interest rates. Hence, very high monthly installments.
Now, with leasing, your poor credit could really do harm. If you need a car and you have bad credit, things become difficult.
What credit score is required to buy or lease a car?
Buying or leasing a car with bad credit
Leasing a car can be harder than buying it if you have bad credit. The reason being that leases apply to new cars only whereas you can by a cheaper used car when you get an auto loan. Here is how credit scores affect the buying and leasing of cars.
The credit score required to lease a car
Having good credit scores is desirable if you are looking to lease a new car. Technically, it is possible to get a lease with poor credit. However, it is not a good idea. This is because your options will be very limited. On top of that, you will be forced to pay exorbitant fees, making getting a good car unaffordable.
If you are not in a hurry to replace your current car, then it is best first to ensure your credit is in shape.
How to improve your credit to lease a car?
Before applying for a car lease, it is best to improve your credit score. This can be done as follows.
- Analyze your credit report to see what you need to work on for your credit scores to improve.
- Go through your credit report to look for any kind of errors that can be used to contest.
- Pay any outstanding debts reflecting on your report and try to repay future loans on time.
- Avoid unnecessary borrowing.
- Ensure your credit card balance is at the low.
If you cannot improve your credit, the car lease itself can help you built it. What you need is to pay each monthly fee on time. This will slowly improve your poor credit, opening you to better loan offers in the future.
The credit score required to buy a car
Your credit score has a direct impact on whether or not you will be approved for a car loan and the amount of interest you will pay. Your lender will first look at your credit score and will make a judgment. The poorer your credit score is, the less likely you are to pay back the loan. Hence, the lender will likely deny your application. If they accept your application, they will have to charge you higher interest rates as a way to mitigate the risk of lending you money.
Therefore, it is possible to get a car loan with your poor credit, but it will be too expensive. If you have time, it is better to work on your credit. This will increase your chances of getting the loan and consequently save you money in the form of lower interest rates.
How to improve your chances of being approved for a lease?
Is it hard to lease a car with poor credit?
The following tips will improve your chances of getting your lease application getting approved.
Make a large down payment
When you sign for a lease, you can put down money known as capitalized cost reduction. This is a large amount of down payment that helps in lowering the amount of the lease and the monthly payments required. Clearing a substantial chunk of the total value will likely increase the chances of getting the loan. Remember that a lot of leasing companies have restrictions on the amount of capitalized cost reduction you can make.
Reduce your debt-to-income ratio
The debt-to-income ratio is the calculation of your monthly debt payments over your monthly gross income. Lenders usually prefer a lower debt-to-income ratio. However, it is not the only financial factor they look at when determining whether or not to approve your loan.
Get someone to co-sign your lease agreement
Getting a family member or a friend with a stronger credit to co-sign your lease is also an option. This will help reassure the lender that their payments will be made on time. The co-signer should fully understand their responsibility as if you fail to pay the loan; they are also in trouble.
Alternatives to leasing a car with poor credit
If your lease application is already denied or if you do not want to lease, then there are a few alternatives.
Take over another person’s lease
You can be approved for a lease transfer or lease sway. This means you will take someone’s lease and be responsible for making the remaining payments and following the original lease agreement. It should be noted; for you to qualify for a lease transfer, you should have a similar credit to the original owner of the lease.
Buy a used car that is less expensive
Used cars are typically lower-priced, which means there is less to finance, and the interest rates are also less. This makes qualifying for a loan for used cars much easier with poor credit than leasing. There are other factors involved.
Look for dealerships with special financing departments
There are dealerships that focus on giving car loans to people with less than appealing credit scores. If you want a new car, look for these dealerships. Remember that you will always pay higher interest rates if you have bad credit.
Things you should know before leasing a car
Leasing a car with bad credit, is it worth it?
Car leasing allows you to drive a new car without putting a huge sum as a down payment or taking out a loan. Instead, you only pay a small down payment plus monthly charges as stipulated on the lease agreement. The agreement usually lasts between two to three years, after which you can return the car, extend the lease, trade-in for a new car, or even buy the car.
The terms in a lease agreement vary depending on various factors such as creditworthiness, income, down payment, and others. These also vary from one dealer to another.
The benefits of leasing a car
People who opt for leasing a car rather than buying enjoy the following benefits:
Car leasing attracts lower monthly charges
The monthly charges you pay when you lease a car only apply to the period you will have the car. These monthly charges are based on the difference between the value of the car when you begin your lease and its value when the lease finishes.
Car leasing has smaller down payments
Unlike auto loans, car leasing usually only requires a small down payment. This is because there is no loan involved and that you are not buying the car. At times it might be smart to pay a higher down payment on a lease so that it reduces the monthly payments. But if the terms of the lease are good enough, this will not be necessary.
Car leasing saves you on repair expenses
Generally, new cars have fewer repair issues that used ones. Plus, if you need to have a leased car service, it may be included in the warranty of the car. The major maintenance will be on the oil changes, brakes, and tires.
With leasing, you will always be driving new cars
Most leases do not go beyond three years. When you start the lease, you get a new car, and when the lease expires, you have the option to switch to another new car. This means you will always be driving new cars. Moreover, leasing offers you a chance to drive more luxurious cars, which would be too expensive to buy outright.
With leasing, you don’t have to worry about the hassle of selling the car
Normally, when you want to sell your current vehicle to get a new one, there is a lot of hassle involved. You have to do some repair and pimping for the car to look nice, there is always some back, and forth during negotiations, the buyers have to be vetted, there is a process involved in transferring ownership, and sometimes you may have to put an ad out. For leasing, this will not bother you. When the agreement expires, the dealership sorts everything out for you.
The disadvantages of leasing a car
As shown, leasing a car has a number of positives. However, there are some negatives to think about before any decisions are made.
With leasing, you lack the ownership of the vehicle
The car is not really yours when you lease it. There are some limitations put on you, and you are bound by the terms of the agreement. You also cannot make any modifications or alterations to the car. These are things you won’t worry about if the car is yours.
Leasing comes with restrictions of use
The popular, pocket-friendly leases are severely restrictive on how you use the car. There is a limit on the millage you are supposed to cover a year. Some can limit as low as under 10,000 miles a year. Going beyond the restricted limit attracts some extra charges. Usually between 10 to 25 cents for each mile beyond the limit. If you are commuting over 30 miles to work every day, plus using the car on the weekends, you can hit the 10,000 miles limit very fast. Then after that, you will be paying a surcharge per mile. This can make leasing less of a bargain.
In the long run, leasing becomes more expensive
Over time, leases add up to be financially more expensive because you are required to pay the monthly charges. Moreover, every time you take a new car from the dealer, you will have to pay for the loss of value of the car. That is, the status of the car immediately goes from new to used, and that has to be compensated. Lastly, leasing a car may require you to purchase GAP coverage. This helps you cover the difference between the value of the vehicle and what you owe.
A lease leaves you with no cash for your next car
When you purchase a vehicle, and you have positive equity, the value of the car becomes more than what you owe. That is, you can sell the car and get a lot of money to use on your next buy. However, with a lease, you cannot get this. Furthermore, there are some end-of-lease charges that get very expensive. For example, if the car has a lot of wear and tear, then you need to cover that. Or, if you terminate the lease before the stipulated date, then you have to pay for that as well.
Lease agreements have complicated terms
Generally, lease agreements go into great details that make it complicated and difficult to understand. The lease terms need to be strictly followed, or else there, you will pay hefty fines. If you do not like strict restrictions every time you drive, then leasing might not be the choice for you.
Things you should consider before buying a car
Buying a car with bad credit, is it worth it?
Buying a car has a different and more complicated process than leasing. Even with its complications, buying a car has its advantages. You can buy either a new car or a used one from someone or from a dealership. If you are getting the new car from a dealership, ask if they accept trade-ins so that you can give them your old car to reduce the price of the new one.
Wherever you are getting your new car from, it is best to check with multiple sellers around to see your options and get the best deal. And if you find the seller you want, whether a private party or a dealership, try to negotiate to reduce the price even lower.
You will most likely require an auto loan for your purchase, that is unless you are willing to buy it outright with cash. You can find your own lender to give you the loan, that is, a credit union or a bank. You can also get the loan directly from the lender or even work with a lender that the dealers have partnered with. Most of these auto loans require you to make a large amount of down payment for you to get approved.
The terms of an auto loan depends on many factors, including your creditworthiness and your income. After approval, you will be required to make monthly payments of principal and also interest. At this time, the lender still holds the title of the vehicle and documentation of ownership. The car will fully be transferred to you plus its title after clearing off the loan, making you the owner.
The benefits of buying a car
Buying a car instead of leasing comes with several perks.
Buying a car gives you complete ownership
Initially, when you are paying off the car loan, the dealer holds the title of the car, making them the legal owners. However, even so, you have no restrictions when using it. You can do anything with the vehicle. The only requirement you will see from the lender is an auto insurance cover.
Owning a car guarantees you cash for your next car
After a while, you are bound to get tired of your car, and you may want to sell it. If you have positive equity, you will get some cash justify over after the sale, which could finance the down payment of your next car. This will potentially save you a lot.
Owning a car will save you money in the long term
Auto loan payments are more expensive than the monthly lease payments. However, for the lease, the payments do not stop after leasing the car. There are additional payments depending on the lease agreement. These payments can pile up to be very costly. On the other hand, with the auto loan, after clearing the payments, the car becomes yours completely. The only costs are the usual repairs and maintenance.
Buying does not attract end-of-lease costs
When your lease expires, there are some charges you have to pay to cover for mileage surcharges, excessive wear and tear, and other payments as per the lease agreement. This will not apply if the car is yours.
The disadvantages of buying a car
Buying a car is not all positives compared to leasing. There are some downsides.
Buying a car requires higher sales costs
Buying a car requires you to put down more money than you would normally do when you want to lease it. This is a big barrier, especially if you do not have a huge sum of money on hand.
Buying a car requires higher monthly payments and repair charges
Buying a car using an auto loan is usually more expensive, with higher monthly payments in the short run. These charges also include interest rates. Moreover, if you want to keep your car for long, then you should be prepared to part with a lot of cash for constant maintenance and repair.
Cars depreciate over time
Whether you purchase a used car or a new car, its value is bound to depreciate over time. If by chance, the value of your car depreciates faster than the time it takes to repay the loan, then you will have negative equity. If this depreciation happens and you want to sell or trade the car, or the car gets totaled, then you will require to make a lump-sum payment to the lender so as to cover the shortage. If you are unable to do that, you will probably be stuck with a car you no longer need nor afford.