See the results of our 2022 Personal Finance Study!
If You Have Bad Credit, Should You Buy or Lease a Car?
Bad credit might make it more difficult to get a car, but a car might be necessary to get a job that would help you improve your credit. Of course, there is more than one way to acquire a car.
Here's the question: If you have bad credit, should you be buying the car? Or should you lease? Which is the better option?
What’s the difference between buying and leasing?
The difference between buying a car and leasing one is basically the same thing as buying a home versus renting an apartment. When you buy a car, it is your property. But when you lease a car, you are only renting it from the actual owners.
Unless you have enough money saved up to buy a car outright, buying one is going to mean taking out an auto loan. You’ll be making monthly payments on that loan, and you’ll be responsible for making repairs, car maintenance, etc. Once the loan is paid off, you will be the vehicle’s sole owner.
When you’re leasing a car, you sign a contract with the dealership. In return for making your monthly payments (plus additional fees), you get to use the car for however long the lease agreement lasts—usually two to three years.
Since you don’t own the car outright, leasing a car means there will be some restrictions on how you can use it and what you are responsible for. For instance, most lease agreements cap how many miles you can drive per year, and they will charge you extra fees if the car is damaged beyond “normal wear and tear.”
There are benefits and drawbacks to both. Owning a car is more expensive, but you also come away with an asset at the end of it. Meanwhile, leasing a car means that you don’t have to deal with the responsibilities of ownership and the hassle of maintaining an older vehicle. Once your lease expires, you can always trade it in and start a new lease on a new car.
But about folks with bad credit? How does that affect the choice between leasing and buying?
How bad credit affects buying and leasing
A bad credit score is going to make both buying and leasing a car more difficult. You’re more likely to be denied for a loan or a lease, and you’re going to pay higher rates. (For more about bad credit loans, for cars or anything else, check out the OppU Guide to Bad Credit Loans.)
When you have a low score, it’s basically a signal to lenders and/or dealerships that you don’t have a good history of paying people back. That means you’re a risk. And lenders/dealerships hate risk. They’re going to charge you more money in order to protect themselves against a potential loss.
With unsecured personal loans, a bad credit score can mean you're locked out.
With auto loans, it’s a bit different. Auto loans use the car you’re purchasing as collateral. If you don’t pay the loan back, the lender can repossess the car and sell it in order to recoup their losses. This means that you’re probably less likely to be denied for an auto loan, even if you have bad credit. However, you will be paying a much higher interest rate, which translates to higher monthly payments.
But when it comes to leasing, your poor credit score could really leave you stranded.
Bad credit scores are hard to deal with, especially when you don’t have a car and need one,” says Sophia Borghese, a New Orleans-based car consultant. “Getting a car that can get these people to and from a job is an important step because getting to work can improve their credit. However, knowing if it’s better to lease or buy is another story. While there are many pros to leasing a car with bad credit, there are many more cons to it.
It’s hard to lease a car with bad credit
According to Borghese, “Leasing a car can mean lower monthly and down payments, which are great ways to save money while improving a credit score, but credit score matters to car dealers.”
While using a car as collateral can help you secure an auto loan—even if it does come at a higher rate—the same doesn’t apply to a lease. If you fail to honor your lease, the dealer still owns the car, just like they always have. All they’re left with now is a broken lease and a car that is less valuable than it was when the lease began.
This means that dealerships are much less likely to lease to people with poor credit ratings—and are going to charge a lot more for the privilege.
“Car dealers only want to lease a car to a driver with high credit scores,” says Borghese. “This prevents the dealer from risking not receiving monthly payments from the driver."
Are the lower payments for a lease worth it?
If you have bad credit and need to buy a car, the choice between buying or leasing might actually be an easy one. Depending on whether or not you can get approved for a lease, there might not even be a choice.
But if you can get approved for both a loan and a lease, then the choice becomes harder. Even with the added costs that come with a low credit score, that lease might still be cheaper than the payments on a car loan.
Does that mean a lease is better? Not necessarily.
“While buying a car for the long term can very well be more expensive, it’s easier to take out a loan than it is to lease on a bad credit score,” says Borghese. After the loan is paid off, the driver will no longer have the burden of monthly payments on the car. This can help the person with a low score do better in the future.”
Remember: leasing a car means you’ll always be making payments. There are many benefits to owning your car outright, and freeing up space in your monthly budget may be one of them
“All in all, a car can be expensive either way,” says Borghese, “but being able to pay what is owed is important to car dealers. If one is burdened with bad credit, they can always check out all the less expensive used car options and go from there.”
Sophia Borghese has been researching and writing about cars as a consultant for Superior Honda since she moved to New Orleans from Ohio. She enjoys learning about new strides in the automotive industry and is excited about the future of car dealerships. As a small car lover, she gets excited about new sedans and hybrid cars on the market.