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Can You Lease or Buy a Car with Bad Credit?

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Buying a car can be a challenging process for anyone, but especially if you have a low credit score.

If you have bad credit, you’re probably wondering if it’s even possible for you to lease or buy a car. Rest assured, you can. But there’s no way to sugarcoat it: You’ll have more hurdles to overcome, though you’ll also have more options than you probably think you do.

Before we dive in, check your credit score for free through My LendingTree. You’ll use this score throughout the car-buying or leasing process.

Leasing a car with bad credit

If purchasing a car isn’t in the cards for you financially, you may want to consider leasing a vehicle. Let’s break down what your leasing options are if you have a low credit score.

What is leasing and how does it work?

What exactly is a lease? Well, the National Credit Union Administration defines it as “a contract transferring the use of property or occupancy of land, space, structures or equipment in consideration of a payment (e.g., rent)”. Essentially what that means is when you lease a car, you’re renting it. This means you hold no ownership value of the vehicle you’re leasing, but at the end of your leasing period, you’ll usually have the option to purchase the car for a favorable price.

When trying to lease a car, you’ll generally encounter closed-end leases. A closed-end lease requires you to return the vehicle upon the lease term end date and pay any remaining costs or extra fees (like for surpassing your mileage limit), before relinquishing the vehicle. Ending a lease early may result in early termination charges.

Throughout the leasing term, you’ll pay a monthly payment, as well as ongoing maintenance or repair costs.

What credit score do you need to lease a car?

The average credit score used by customers to obtain a new lease was 724 in the third quarter of 2018, according to Experian. Of course, there is no exact number you can count on, but know that if you’re relatively close to that number, you’ll have options.

How to lease a car with bad credit

You can lease a car with a low credit score. In fact, Experian found that 15.4% of consumers with nonprime (601-660) and 6.15% of subprime (501-600) scores were able to receive new leases. But it may be difficult for those with very low credit scores, because dealers won’t always trust that they are reliable and can responsibly pay their lease payment on time.

Buying a car with bad credit

First, the good news: It’s easier to purchase a car than lease one when you have a bad credit score. The not-so-good news? You’re facing a higher interest rate on your loan. While you may be able to obtain a loan with a low credit score, the Consumer Financial Protection Bureau says consumers with a less-than-ideal score can expect to pay higher interest rates on loans. Why? A poor credit history causes lenders to worry that the loan won’t be paid in full. Purchasing a used vehicle may help you receive a lower rate at the value if the vehicle costs less than a new car.

Here’s a look at the realities of buying a car with a low credit score.

What credit score do you need to buy a car?

Experian estimated that the average credit score used by customers to obtain a new loan in the third quarter of 2018 was 714. The necessary credit score for a car loan is based on many factors, like if the loan is for a new vehicle or a used one. Paying a larger-than-required down payment can also assist you in receiving a lower-interest auto loan.

The CFPB advises shoppers to compare multiple auto loan options and prepare to negotiate the cost of their vehicle and loan rates.

How to find a lender

The good news is that you have options. The CFPB presents three of the most common loan options for all auto shoppers: direct lending, indirect lending and a loan concept referred to as “Buy Here Pay Here.”

If you choose direct lending, you’ll apply at the lender, typically a bank, credit union or other financial institution. You’ll receive an interest rate quote or a conditional commitment letter from your lender that you can use to purchase your car. Ideally, you’ll consider multiple loan offers before making your car purchase.

Indirect lending is arranged with the dealership where you’re planning to purchase a car. The process is similar to receiving a direct loan, except the dealer will obtain the direct loan for you and then sell it to the lender once you’ve purchased your car.

If you’re having trouble getting a direct or indirect loan due to a low credit score, you can consider financing directly through the dealer. But receiving your loan directly through the dealer can result in a higher-than-average interest rate.

Should you wait to buy or lease a car?

This is a tricky question to answer, and one that really depends on your financial needs. Take a hard look at what it would mean to own or lease a car for your monthly budget, career and family. There are benefits on both sides, of course.

Why you should buy now

  • If you make all your loan and lease payments on time, your credit score should improve.
  • You can refinance your auto loan if needed, or as your credit improves. Calculate how refinancing can save you money during the life of a loan with LendingTree’s Auto Refinance Calculator.

Why you should wait

  • Taking time to improve your credit score may allow you to receive a lower interest loan later on. If you default on a loan or lease payment, your credit score might decrease further.
  • With a higher credit score, you’ll increase your options for loan providers and dealerships willing to lease you a vehicle.
  • You can save for a larger down payment on a car, which may lower your monthly payments and interest.

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