Car leases draw motorists in search of new or barely-used vehicles for lower payments. As a general rule, you pay less a month for a leased vehicle than one whose purchase you finance through a loan. As we explain below, this lower payment comes because you are not paying for the whole value of the car. Instead, in a lease, you are paying for the depreciation of the vehicle’s value while the vehicle is in your care.
To qualify for a lease and for advantageous terms, you must demonstrate the ability to afford the vehicle payments and sufficiently good credit. That means your credit score factors prominently in whether you can fetch a lease that works for you.
The Figures
The credit score needed to lease a vehicle varies by manufacturer or dealer and type of vehicle. With that said:
According to Experian, vehicle lessees posted an average credit score of 729 in the second quarter of 2020. Those with credit scores of 661 to 780 generally get the tag of “prime” borrowers, while FICO designates scores in this range from “Good” (670 to 739) to “Very Good” (740-799).
As a rule of thumb, dealerships require a minimum credit score of 620. However, having a score of at least 620 does not definitely qualify you for a lease. Those whose scores fall below 660 have only a 22 percent chance to qualify for any lease.
Why the Credit Score Matters in a Lease
Default Risk
Your credit score helps lenders, landlords, vehicle finance companies and credit card issues evaluate the likelihood that you will pay on time. Those with “Prime” credit (670 to 799) or “Super Prime” credit (above 780) are considered more likely than not to fulfill their payment obligations. Such consumers generally present a lower risk of default than those with credit scores south of 670. At the riskiest end of consumers lie those with “subprime” credit, or scores lower than 600.
The default risk is one component of your interest rate. In the car lease realm, the term “lease factor” functions as a form of interest.
Can You Afford the Payment?
Low credit scores signal missed payments. Indeed, payment history accounts for 35 percent of your FICO score. If you find yourself delinquent on your other credit or loans, chances are that you cannot afford certain monthly lease payments. As a result, you might find some vehicles beyond your reach for a lease.
At its foundation, the lease payment turns on the amount of depreciation throughout the life of your lease. This is because, once the lease ends, the dealer remains the owner of the vehicle. However, the vehicle is worth less after you return it than when you took possession.
In figuring the amount of depreciation, the dealer sets a capitalized cost. This number represents the car’s “price,” for which you can negotiate. The dealer then determines the vehicle’s value at the end of the lease period. By subtracting this residual value from the capitalized cost, you arrive at the amount of depreciation.
The base payment equals the depreciation divided by the number of months in the lease. You then apply a “lease factor” (or “interest rate”) to determine the lease charge. With the sum of the lease charge and the base payment, you get your total monthly lease payment.
With a higher credit score, you are more likely to qualify for a vehicle with a higher “price.” This means you’re more likely to get a newer model. In addition, you’ll qualify for lower rates. Dealers who offer them reserve “zero percent” rates for Tier 1 customers. Such lessees usually present with credit scores of 700 or more.
Your Alternatives
If you prefer vehicle leasing, here are some ways to increase the score:
*Lower your credit utilization rate, which is calculated as your balances divided by credit limit. Thirty percent of your score turns on the utilization rate. To keep the rate low, avoid closing credit cards with low balances and high limits. Apply any extra money in your budget to pay down card and loan balances.
*Improve your payment history. Along with paying credit cards and loans on time, apply for Experian Boost to have Experian report your water, electric, and other utility bills.
*Maintain a lengthy credit history by not closing credit accounts you have held for sometime. In many cases, these older accounts have zero or low balances.
A low credit score may signal that you need to consider purchasing a pre-owned or lower-priced vehicle rather than pursuing a lease. Look for auto dealers that finance transactions in-house and show more willingness to lend to customers with poor credit.
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