What Credit Score is Needed to Lease a Car?
By Ben LuthiReviewed by Lauren Bringle, AFC®
The average credit score
on a new car lease is 722, according to a report by Experian
for the second quarter of 2018. That said, roughly 23.1% of people with a credit score of 600 or less chose to lease instead of buy.
“Each lender sets its own underwriting standards differently, so there isn’t a global minimum credit score for getting a car loan to lease or buy a car,” says Sonia Steinway, cofounder of Outside Financial.
But just because you can get approved doesn’t mean it’s a good idea. So what is the credit score needed to lease a car? This article will cover everything you need to know.
What to know about leasing a car
So, what’s a good credit score to lease a car? That may depend on several factors. Leasing a car instead of buying one can be appealing for people who want to drive late-model cars without the higher monthly payments associated with an auto loan. However, the process of car leasing and the terms you have to agree to are a lot different than what you may be used to with auto loans.
Don’t know what credit score is needed to lease a car? Here's what you need to know.
Common car lease terms
As with buying a car, it's essential to negotiate the terms of a vehicle lease with the car leasing dealership. To do so, you'll need to understand the basic terms that are associated with leasing a car.
Also called the "cap cost," this is the sales price of the vehicle plus any additional fees you decide to roll into the lease term instead of paying upfront. The capitalized cost is the amount at which the dealer sells the car to the leasing company, and it directly affects your monthly payment for your leased vehicle.
Capitalized cost reduction:
Sometimes called "cap reduction," this is anything that reduced the capitalized cost of the vehicle at the car dealership, including a trade-in, down payment or rebates. The cap cost minus the cap reduction is called the adjusted capitalized cost or net capitalized cost.
This is the amount a leasing company may charge to arrange the vehicle lease. You can pay it upfront or add it to the capitalized cost.
The moment you drive a new car off the dealer lot, it loses value, and most cars continue to lose value over time. Depreciation is the exact amount of value your car is expected to lose over the duration of the lease, and because you’re essentially renting the vehicle, it makes up the majority of your monthly payment. The amount your car is worth at the end of the lease is called its residual.
Instead of stating your interest rate clearly, vehicle leasing companies use what's called a money factor, which is presented as a decimal number. To figure out the interest rate on your lease, multiply the money factor by 2,400. For example, a money factor of .0011 gives you an interest rate of 2.64%.
This is you and anyone else on the vehicle leasing contract with you. The lessor is the leasing company.
Sign and drive lease:
This is a type of lease that comes with special terms, such as no down payment and no security deposit. These are typically offered on a promotional basis, and you typically need stellar credit to get approved.
Leasing a car can help build credit
Just like an auto loan, leasing a car can help build your credit score
. To make sure it does, contact the leasing company before you sign the contract to ensure they report your monthly payments to the three national credit reporting agencies.
Keep in mind, though, that while on-time lease payments can help your credit score, missed payments can hurt it
. Also, if you pay off your lease early, it can affect your credit score because the tradeline will report as closed instead of open. That’s not necessarily a bad thing, but a closed account
won’t continue to generate a positive payment history
like an open lease will. By making regular payments to your dealership, you may be able to raise your credit rating little by little.
How to get a good deal on a lease
While leasing a car can be cheaper than buying one — at least in the short term — you’ll still want to do your due diligence to get a good deal. Here are three tips that can help:
1 - Shop around
Depending on the car you're looking to lease, you may find that different dealers have different prices for auto leasing. Take some time to research multiple dealers to get the best deal in your area.
In general, it's best to go through a car dealer to get a lease to ensure you're working with a reputable company.
2 - Negotiate
Your lease term will be based on the vehicle's sales price minus capitalized cost reductions. Before you tell the car dealer that you want to lease a vehicle, work on negotiating the sales price. Knowing prices at multiple dealerships can help, as can knowing the value of the vehicle from Kelley Blue Book or NADAguides before approaching your car dealership.
Some dealers may insist on the manufacturer’s suggested retail price, but they typically bought the car for much less than that, so you may be able to settle somewhere in the middle. Also, avoid focusing on the monthly payment — dealers and leasing companies can offer lower monthly payments with longer leases, but your goal is to pay the least amount possible, which is directly tied to the sales price.
3 - Make a big down payment
The more money you put down, either in the form of cash or a trade-in, the lower your monthly payment will be throughout the life of the lease term. What's more, a bigger down payment can potentially qualify you for a lower money factor - this is due to the fact that you're reducing the amount of risk the leasing company is taking on.
A big down payment can especially be helpful if you have bad credit
Can you lease a car with bad credit?
When you apply for a lease, the leasing company will run a hard check on your credit reports, which can temporarily affect your credit score
. They’ll also check your debt-to-income ratio
, which shows how much of your monthly income goes toward debt payments. The higher your DTI, the riskier you are as a borrower.
Based on the Experian report, it’s possible to get approved for a lease if your credit score is below 600. With some leasing companies, you may even be able to get a lease with a repossession or bankruptcy
on your credit report — although, your bankruptcy will typically need to be discharged before you can qualify.
If your credit score isn’t in great shape or you don’t have a job, you may still be able to qualify for a lease with some leasing companies. However, you’ll improve your chances of getting approved with a creditworthy cosigner
with a good income.
But there are a few things to consider before you choose to go that route.
Better score, better terms
If you want to lease a car with favorable terms, you’ll likely need a good credit score.
For auto leasing companies, that typically means having a score of 700 or above. Having a good credit score will also give you more power to negotiate the price of the car
. For example, if you don't have money to put down, you may negotiate higher monthly lease payments - or vice versa.
Most importantly, you’ll have a better chance of getting approved for promotional financing options, which can sometimes make leasing the cheapest option available.
That doesn’t mean you can’t get approved for a lease with a 650 credit score, or even a 600 or below. But the lower your credit score, the more you can expect to pay in interest over the life of the lease.
Bad credit can limit your options
If your credit score is considered bad, you may have a hard time getting approved by some leasing companies. You may also be limited to certain makes and models, which can be frustrating if you want a specific car.
So if you’re planning on leasing with bad credit, be prepared to spend a lot of time shopping around, and make sure you have a few vehicles in mind in case your top choice isn’t available. Also, Steinway recommends leasing a used car instead of a new one.
“Although it’s a very small part of the leasing market, it is possible to lease a used vehicle,” she says. “Not all dealerships offer used leasing, so you’ll need to call or email beforehand.”
You’ll pay more
There are two factors that influence the cost of an auto lease: the value the vehicle is expected to lose over the life of the lease and interest charges. Only the second factor depends on your credit.
From the leasing company’s perspective, it’s taking a big risk with your bad credit. To mitigate that risk, you can typically expect to pay more upfront — a bad credit lease with no down payment is likely out of the question — as well as on an ongoing basis. Depending on where your credit stands, leasing may be unaffordable on your budget.
Unfortunately, there’s no central dataset that shows exactly what your interest rate will be based on your credit score.
“Just like taking out a loan, the amount of a lease payment depends on the interest rate the lender sets,” says Steinway.
So it’s important to compare rates and terms with several leasing companies to ensure you’re getting the best deal. With good credit, however, you could save hundreds if not thousands of dollars
on a new lease, so it’s worth waiting until your credit gets there before you apply.
Also, keep in mind that if you have no credit
at all, it can be just as tough to get approved for a lease than if you have bad credit. While there are some leasing companies that may offer no-credit leases, expect to run into the same problems as subprime folks.
Finally, it’s important to note that having a bad credit score can not only impact your lease terms but also your insurance premiums on the leased vehicle. Many auto insurers use what’s called a credit-based insurance score
to help determine rates, and a lower credit score can result in a higher rate.
Should you lease or buy?
If you’re considering leasing a car, it’s important to determine whether it’s the right choice at all. Whether you have bad or good credit, you can typically expect to get bad or good terms either way, so you’ll want to consider the other aspects of each option to make the right decision for you.
|Lower monthly payment
||Higher monthly payment
|Repairs typically covered by warranty
||May or may not come with a warranty
|Can choose a new car every few years
||Getting a new car involves selling the current one
|Doesn’t allow modifications
||You can modify the vehicle without breaking any contract
|Restricts how far you can drive
||No driving restrictions
|Can cost more in the long term
||Can cost less in the long term if you keep the car after the loan is paid off
Pros and cons of leasing
When you lease a car, you’re essentially renting it for two or three years, sometimes longer. But since you don’t own it, there may be restrictions on how many miles you can drive and modifications you can make to the vehicle, and you may be penalized if the car shows damage beyond normal wear and tear.
“Surcharges for mileage or wear and tear can add up, especially if you have kids or pets that are hard on your car,” says Steinway.
That said, leasing is typically cheaper than buying, at least in the short term. If you’re not the type to want to buy a car and run it into the ground, leasing gives you the option to trade in your car for a different one every few years.
Pros and cons of buying
Buying a car can be more expensive than a lease in the beginning. Not only are your monthly payments higher but you may be on the hook to pay for repairs out of pocket if you don’t have a warranty.
But if you purchase a car and keep it long after you pay it off, you could save a lot more money in the long run.
Plus, there are no restrictions on how far you can drive, and there’s no contract that requires you to maintain the car in a certain way.
While you won’t get penalized for damage beyond normal wear and tear, that can affect the price you get for the car when you end up selling it, so it’s still a good idea to take care of the car.
How to improve your credit through your lease payment
When it comes to vehicle leasing, the most important thing to keep in mind is to make your credit payments on time. Whether you already have great credit or not, making timely payments should improve your credit rating in the long run. Throughout the duration of your auto lease, you can continue to support your credit history through regular payments.
Which option is best for you?
There’s no right answer to this question for everyone, so it’s important that you consider both the benefits and drawbacks of each. Consider which option is more cost-effective for your situation. And if cost isn’t the most important factor for you, consider the overall net value that you’d get with both options to pick the best one for you.
Regardless of what you do, make your decision long before you actually sign anything.
“Financially, the best bet is to compare your financing options before you go into a dealership,” says Steinway. “Evaluate not just monthly payment, but the total cost of the loan or lease over time, including any down payment.”
- The Balance. "Is Your Credit Score High Enough to Lease a Car?". https://www.thebalance.com/is-your-credit-score-high-enough-to-lease-a-car-4156425
- Credit Karma. "What’s the minimum credit score needed for a car loan?". https://www.creditkarma.com/auto/i/credit-scores-car-loan
- Insider. "How to finance a car and get yourself on the road". https://www.businessinsider.com/personal-finance/how-to-finance-a-car-buying-guide
About the author
Ben Luthi is a personal finance writer who has a degree in finance and was previously a staff writer for NerdWallet and Student Loan Hero. See Ben on Linkedin
About the reviewer
Lauren Bringle is an Accredited Financial Counselor®
with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).