See the results of our 2022 Personal Finance Study!
To Lease or Not to Lease (a Car)
The modern world requires a fair amount of traveling on a daily basis. Unless you work out of your home, you will probably have to either take public transit, drive a car, or learn to run incredibly fast if you want to get to and from work, school, the grocery store, and any other place you have to be.
While public transit and incredibly powerful legs tend to be cheap, cars are not. If you have good credit or tens of thousands of dollars in cash on hand, you should not have a problem getting a car. But if your credit is not so good, your ability to get a car will decrease. So is it possible — or wise — to lease a car with bad credit?
Leasing a car
On a basic level, leasing a car is like leasing an apartment. You pay a certain amount of money per month to use the car in a manner, similar to owning it. However, you do not build equity in the car and will have to return the car at the end of the lease. Additionally, like leasing an apartment, you may be on the hook for repairs and maintenance. It is important to carefully read over the lease before you sign it so you know exactly where your responsibilities lie.
You may also have to pay additional costs for “wear and tear” at the end of the lease. So while a lease is more manageable than trying to pay for an entire car with one large lump sum, it can end up costing you more money overall, especially because you will not be able to sell the car at the end of its use. Much like renting a home, you will have to figure out if leasing makes more sense than buying and paying off the car in installments.
Leasing a car with bad credit
If you have good credit, you should be able to find a car lease at a good rate. If you have bad credit, you still may be able to pull it off, but it may not be beneficial for your bank account.
Sonia Steinway, co-founder and CEO of Outside Financial, said it is possible to lease a car with bad credit, as these numbers by Experian show, but she wouldn’t recommend it.
“Everyone’s situation is different, but in general, I would not recommend it for most people,” she said. “Most banks, credit unions, and other finance sources don’t offer leases. That means the average customer is restricted to using captive financing (like Toyota Financial Services or GM Financial), at whatever rate that lender is willing to provide.” As a result, it may be more cost effective to purchase a vehicle, especially if the customer can get a better interest rate on the loan.
Do the math
We cannot tell you what makes the most sense for your specific situation, which is why it is important to do your research. It may require some math, so pull out a calculator and figure out the exact cost of your options.
“The best way to compare loans is using the annual percentage rate, or APR,” Steinway explained. “For leases, the best way to compare is with the money or lease factor. The money factor is just the annual interest rate divided by 2400. The reason that leases are calculated differently than loans is because a lease is really two different loans: one including interest over the length of the lease, and one for the residual amount remaining at the end of the lease period.”
Steinway offered an example: “If the APR on the loan part of the lease is 8.5%, you would divide that by 2400 to get a money factor of .0035. Some dealers convert that into a whole number – 3.50 – to make it easier to say (or to make it more confusing).”
If you do decide to pursue a lease, Steinway urges the importance of getting the best deal possible and keeping your mileage down, which should be able to save you some money.
Ultimately, if you need a car, you need a car. But if it is possible to borrow one from a friend or wait until your credit improves, those are likely better options.
Sonia Steinway is the co-founder and CEO of Outside Financial. She is a former management strategy consultant and “recovering attorney” with a passion for helping people make sense of their financial lives. She received a Bachelor of Arts from the University of Pennsylvania, summa cum laude, and a JD from Yale Law School. She has written several articles on consumer finance and financial regulation, and she is frequently quoted as an auto finance industry expert in publications such as Forbes, Reader's Digest, and USA Today.