Despite how it might sound, a lease to own car buying program isn't merely a typical lease program under a different name. A traditional lease usually gives you a chance to buy the car at the end of the contract. However, a lease to own program is more like renting to own a house. You make monthly lease payments for an agreed-upon term, and at the end of the term, you will own the car. In some ways, this isn't too much different from financing a vehicle, but there are some differences.
Lease-to-Own vs. Financing or Leasing
When you enter into a lease-to-own program, you get to drive the vehicle and also make payments, but you won't take ownership until the rental term is up. The leasing company's name stays on the title until you pay it off. When you finance a vehicle, the title belongs to the bank until you pay it off. The other difference is that when you finance a car, you'll usually be able to pick what you want, whether new or used.
The vehicles are usually pre-owned in a lease-to-own program, and there's a specific selection of which to choose. In a traditional car leasing situation, you're generally getting a brand new vehicle. Even so, there's typically a harsh mileage limit, so you'll have to closely monitor the number of miles you're driving each year with a traditional leased vehicle.
Lease-to-own programs are usually good options for those with lower credit scores as the car dealerships don't always check credit. As long as you have the required income and down payment or trade-in, it's usually not hard to get approved. The vehicles tend to be in as-is condition, though, so you might want to buy a service contract or an extended warranty for assurance.
Pros and Cons of Lease-to-Own
As with any program for buying or leasing a vehicle, there are pros and cons to the process. The disadvantages might be too overwhelming for some car buyers, but for others, it's a good option when they need a car and lack many other options. It may also be interesting for the fact that the vehicle is owned at the end of the lease. Let's take a look at a few pros and cons:
- Lower prices on used cars versus new.
- Payments can be formed around your payday schedule and can be weekly or bi-weekly.
- There are rarely credit checks and lower upfront costs.
- Buy and sign and the same place, instead of dealing with a credit union or bank.
- You may need to make payments at the lot until the end of your lease.
- Payments are often not reported to credit bureaus. If you're trying to improve your credit, this might not help.
- Only used vehicles are available.
- Short lease terms and high interest might make for unusually high payments.
It's important to know that you can't lease to own a car just anywhere. There are lease-to-own dealer networks that are sometimes also called rent-to-own vehicle lots. These dealerships specifically work with customers who have poor credit ratings, and they function similarly to other rent-to-own businesses that sell things like electronics and furniture.
When you visit one of these dealers, you choose an available vehicle on the lot and then enter into a lease agreement. Once you've completed all your payments on the vehicle, it belongs to you.
Most of these dealerships don't perform credit checks since you're technically just renting the car. It is similar to a car rental outfit not checking your credit. The only difference is that you're renting it for a longer term. If poor credit is keeping you from finding a car, no credit check is potentially a huge bonus.
Popular Lease-to-Own dealer networks:
Auto Credit Express
These are a network of dealer partners that has closed over a billion dollars worth of auto loans for customers with bad credit. They specialize in helping those with no or inadequate credit, as well as those with bankruptcy and repossession on their history. Those with bad credit need to have at least $1,500 per month in income. When you apply at this site, you can connect with its dedicated program for lease-to-own dealerships.
Similar to the previous one, this site specializes in loans for those with bad credit and first-time buyers. It also offers help for subprime borrowers. The biggest draw is a lack of application fees and the fact that they have one of the more extensive networks among lease-to-own dealership programs. They also tout getting same-day approval and connecting you with a dealership in your area right away.
My Auto Loan
This site offers loans for new cars, used cars, and for those wanting to refinance. They work with customers with bad credit as well. They work by submitting your information to lenders all around the country, which means you might have more options vs. only those in your area.
Typically, leasing to own a vehicle comes with specific benefits to those with no credit or bad credit. It's more similar to a traditional auto loan vs. conventional leasing.
But at the same time, the mechanics are much the same across all three. If you miss car payments with any of these options, the car can be repossessed. You also won't own the vehicle until you've made all the payments. The most significant difference here is the lack of a credit check. Both conventional finance and leasing contracts often require better-than-average credit.
So why lease to own? If you have bad credit, it might be your only option. In most cases, you won't even need to get a credit check. Approvals are usually fast and easy with no hassle as long as you can prove your income to the standards of the dealership you're working with. In a true rent-to-own program, there's no interest since you're just renting the car.
However, there are usually dealer fees and the total cost of the vehicle. For example, how much you end up paying will be higher than market value compared to buying it traditionally. But, and the end of the day, you end up owning the vehicle without having to worry about residual value (related to depreciation) and other factors that play into the costs of a traditional car lease. At the end of the lease period, you own the car, even if the purchase price ends up being more than its MSRP or retail price.
Why Not Lease-to-Own?
Again, unless your credit is terrible, you may want to consider some alternatives before going with a rent-to-own program. Vehicles in this program tend to be well over the market value, and your lease payments and monthly fees might be higher than you would expect. It can be an easy way to spending far more than the value of the car.
These vehicles don't come with warranties and rarely do they come with any other guarantees either. That is mainly due to the leased cars being older and with higher mileage. It means that you're fully responsible for any issues with the vehicle. Even if it breaks down a few days after you drive it off the lot, fixing it is entirely your responsibility. You may end up in a worse situation from a personal finance situation than you started in.
If you have poor credit and are looking to rebuild it, this won't help. Since you're just renting the vehicle and the dealerships rarely do credit checks, that also means they don't report to the credit bureaus. Even if you pay on time for the length of the agreement, it won't do anything for your credit.
These programs are also typically very strict about missing payments. Even one missed payment can trigger repossession efforts by the dealership.
What Are Some Alternatives?
If you have bad credit, you're likely looking at lease-to-own programs as your only option. The lending networks listed here also have loans for people with bad credit. Even if you get approved for a loan with a high-interest rate, remember these payments are reported to credit bureaus. It's sometimes possible to improve your credit within a year or so of paying the loan and then get it refinanced.
Even subprime auto loans can have lower monthly payments than rent-to-own programs. The current market has more vehicles than ever coming off lease, which has lowered the pricing on many. That also means that lenders and dealerships are more eager to work with different types of credit histories simply to get previously leased cars off their lots.
Traditional Lease Deals with Bad Credit
Is it possible to get a traditional lease with bad credit? It's usually a lot harder than getting financing or going through a rent-to-own program. However, it's not impossible. Start by making sure you have all your information and paperwork ready to go when you visit the dealership. Be prepared to provide proof of income as well.
Having a substantial down payment can also convince lenders and dealers to take a second look. If you have poor credit and no money invested in the vehicle, lenders are more likely to pass on the risk. A reasonable down payment can help assure them.
Another option is to get a cosigner. That is someone with good credit who can co-sign on the lease agreement and vow to be a backup if you don't make payments. Their credit score will also take a hit if you miss payments or stop paying. It's essential to make sure you can make the payments before going this route before impacting someone else's financial health.
There's no doubt that, in most cases, it makes the most financial sense to get a traditional car loan that ends with owning the vehicle. Conventional leases may lower your monthly payments, but you either have to find a way to pay for the car at the end of the term or lease a new one for another unspecified amount of time.
You may end up paying for a vehicle for upwards of seven years and paying more for it in the long run. Rent-to-own programs are last-ditch options for those who need a car, have plenty of income, but very poor credit. If it's the only way you can get into a car, it's good to know that it's available.