Leasing a new car can be an appealing option for shoppers who like having the latest technology and a constant warranty. And since payments on a lease tend to be lower than a conventional car loan, it can free up some monthly cash. Whatever the reason, it is helpful to know how your credit score could impact the overall cost of your lease.
There are three main credit bureaus: Experian, Transunion and Equifax. These agencies collect data and calculate credit scores. Financial institutions such as banks then use those credit scores when assessing the potential risk of loaning money to borrowers. Like any kind of lending, financing a car involves risk. And since payment history factors into an individual’s credit score, lenders use it as a measure of how likely a borrower is to pay their loan payments on time and in full.
Typically speaking, a good credit score is anywhere between 660 to 780. Known as a Prime score, a credit score in this range means you should have little trouble qualifying for a car lease. Anything above 780 is considered excellent, or Super Prime. A credit score in the range of 600 to 660 is considered Non-prime, and a score between 500 and 600 is sub-prime. Anything below 500 is Deep Sub-prime.
Most people assume that a bad credit score automatically means a higher interest rate. While there may be some truth to that, there are ways in which you can prove to a lender that you are not a high-risk borrower, even if you have a sub-prime credit score. Get a copy of your credit report before you start shopping. Make sure there aren’t any surprises on it. If you have bad credit, lenders may ask you about certain negative marks on your credit report.
You can take the offensive when it come to proving you are not a high-risk borrower. For example, when you plan on leasing a car, you are expected to pay an amount upfront as part of the down payment. While this amount tends to be less than if you were buying the car, they may want more if you have a lower credit score. Save up some money and put as much as you can towards the down payment. Depending on the car lease terms, this might also help reduce your monthly car payment.
You can also work to pay down any existing credit cards and other debt. Paying down your credit cards will improve your debt-to-income ratio. If you make your monthly payments on time, and pay more than the minimum amount due, it can improve your overall credit score. This activity will show up on your credit report, and show financial institutions that you are actively working to improve your overall credit score.
If you have bad credit because you are young and lack much credit history, you still have options when it comes to leasing. You may be able to improve your chances with car dealerships and lenders by having a parent co-sign on the lease. Having a co-signer might also help you qualify for a better interest rate, too.