What credit score do you need to lease a car?
If you're deliberating about leasing a new vehicle instead of buying, you're joining a growing trend—almost 20% of new cars in the United States are leased.
There is no official minimum credit score requirement to lease a car. Most companies accept 680 or higher, but because cars are big ticket items, the higher your score, the better the deal.
In this article, we'll explain how credit scores affect leasing terms, how to lease a car with bad credit, and how to improve your chances of securing a good deal.
What is the “money factor”?
The money factor is a fraction of 1% (e.g., .00345 is equal to 3.45%) and is used to calculate the finance charge associated with a lease. It’s similar to APR but without compound interest.
Car leases have money factors instead of interest rates because they accurately represent costs associated with leasing, such as taxes, title and registration fees, and the cost of the vehicle.
The formula used to calculate the lease money factor is usually:
Money factor = lease charge / (capitalized cost + residual value) x lease term.
Car dealers and financing companies set the money factor based on a combination of factors:
- Lease term: the duration of the lease
- Lease charge: the total maintenance cost, including taxes and other registration and title fees
- Capitalized cost: the price of the car at the start of the lease, including administrative fees, down payments, rebates, and trade-in value, which may lower the borrowing cost
- Residual value: the estimated car value at the lease's end
Generally, a money factor of 0.0025 and below (the equivalent of 6% APR) is considered a decent rate and will result in lower interest payments over the lease term.
To secure a favorable interest rate when leasing a vehicle, you must have good credit, just as you would when applying for a mortgage or a personal loan.
The minimum credit score to lease a car
Generally, the lowest possible credit score needed to lease a car is between 600 to 620. Credit scores within this range are subprime and only some lenders accept them.
To lenders, a subprime score indicates a higher risk of payment default. If your credit is within the lower range, you will likely have a higher money factor and a more expensive lease.
According to Chase Bank, a score of 700 or more will get you approved for the best loan terms. But, of course, credit score isn’t the only thing lenders look at.
Other factors that influence car lease terms
Even if your credit score isn't ideal, your income, employment record, and existing debt obligations often matter, too, and will be considered by lessors.
Income
A consistent income suggests you can make regular payments. But salaried employees tend to have an easier time securing a lease than those who are self-employed even with a steady income.
Thus, full-time employees who make less than freelancers are still more likely to be approved for a lease—unless the freelancer has an established company with a good track record.
Debt-to-income ratio
Debt-to-income (DTI) ratio is a financial calculation expressed as a percentage that compares your total monthly debts to your gross (pre-tax) income. Ideally, your DTI should be lower than 36%.
Lenders view a DTI of 36% or higher as a risk because it may be difficult for you to successfully manage existing debt and a new car lease while staying within budget.
Credit history
Credit history determines how reliable you are. It includes information about credit accounts, bankruptcies, overdue debt from collection agencies, foreclosure, liens, and judgments.
Even if you have a high credit score or a good income, a checkered history of missed or late payments or maxed-out credit cards can make getting approved difficult.
Driving records
Leasing firms are more cautious if you have a poor driving record because it suggests you may not return the vehicle in the same condition at the end of the lease term.
Major accidents, convictions of driving-related offenses (reckless driving or driving under the influence), and traffic infractions can count against you, even if you have an impeccable financial record.
The challenges of leasing a car with bad credit
You can lease a car with bad credit. It just means higher interest rates, larger down payments, and shorter leases.
You’ll pay more
Bad credit can increase the cost of a lease by 25%-50%. Let’s do the math and figure out how much more that is for an average lease of $540 monthly for 36 months with a 25% increase.
Instead of costing $19,440 for the full lease term, you’ll pay $675 per month, which equals $24,300. That’s almost $5,000 more than someone with good credit.
You may be forced to use in-house financing
Some dealerships offer in-house financing to help, but it's recommended that you take steps to improve your credit before proceeding with this option because there are notable drawbacks.
- Balloon payments: This is a lump sum payment due at the end of the lease, which is much larger than the regular monthly payment. It means you’ll have lower regular payments, but all the money is still due at the end of the lease agreement.
- Limited options: Dealerships that provide their own financing do not have much motivation to be competitive in terms of rates and terms, so you could be missing out on better deals
- No-haggle pricing: Such leases may come with pre-set terms that require you to pay a specific interest rate or a set down payment. This can make it difficult to negotiate for a better deal
You might only qualify for “Lease-here, pay-here” leases
These leases typically require weekly or biweekly payments; however, the rates are higher than with a traditional lease. Additionally, there is often no coverage provided for repairs or maintenance.
Before considering a “lease-here, pay-here” dealership, it’s essential to understand all of the terms and charges. It should be used only as a last resort.
Tips to improve your credit score before applying for a car lease
Depending on your current financial status, you may be able to increase your credit score within 45 days by doing the following:
Pay your bills on time
Timely payments are the key to preventing dings to your credit score and missed payments from appearing on your credit report for up to seven to twelve years. Always pay your bills in full as soon as possible.
Your credit score can take a hit if an account is behind for too long; however, the effects will lessen over time, and the more favorable credit accounts you have, the sooner the recovery.
Lower your credit utilization rate
Keep your credit usage low to get the best credit score. Aim for using no more than 30% of any one card's available credit. The top scorers use less than 7%.
Monitor your credit score profile online, pay down the balance before the end of the billing cycle, or make multiple payments throughout the month to keep the balance low.
Check your credit report
According to a Federal Trade Commission (FTC) study, one in five people have an error on their credit report. So take advantage of the free credit reports from Experian, Equifax, and TransUnion that you are entitled to.
Check for discrepancies such as missed payments, credit activity that belongs to someone else, or outdated information. You can dispute errors with credit bureaus to improve your credit score.
Pay off collections accounts
Collections accounts appear on your credit report and show lenders that you have failed to repay debts. This can make it difficult to access new lines of credit with higher interest rates.
Additionally, collections accounts can remain on your credit report for up to seven years, so paying them off is the best way to restore a positive credit score.
Become an authorized user on someone else’s credit card
If you have a family member or close friend with a credit card account with a large credit limit and a strong history of on-time payments, you can ask to be added as an authorized user.
This practice, often called "credit piggybacking," allows you to capitalize on the principal user's successful payment history, potentially boosting your credit score without using the card.
Final words before you take out a car lease
Ironically, leasing your car can also raise your credit score. Just like paying off the loan, it affects your credit score the same way. So, while you may not get the best lease terms now, you could in the future.
There are also alternative options to getting a better lease with a low credit score such as:
- Making a bigger initial payment
- Taking out a shorter lease
- Using a co-signer or guarantor
- Looking at a lease transfer deal
Overall, if you can, try to improve your credit score before looking for a lease, and remember, no matter your credit score, you should always shop around for the best ideas before signing a lease agreement.