Auto Loans

3 Things You Must Do Before You Lease a Car

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I tend to drive my cars until they die, and a couple of years ago that’s exactly what happened. In need of a new car, but not sure what I wanted for the long-term, I considered leasing a vehicle. But if buying and financing a car seemed confusing, leasing seemed even more overwhelming. I ended up buying instead.

Turns out, though, that while leasing isn’t for everyone, it can have some advantages. Lower monthly payments and more flexible credit score requirements may be two of them.

If you are thinking about leasing, here are three things you can do to help improve your chances of getting approved.

1. Check Your Credit

Your credit score will play a key role in the lease you are able to get. “There are going to be different tiers of credit that will be evaluated,” says Scot Hall, Executive Vice President of WantALease.com, an online marketplace for new lease deals. “If you have better credit, you will get better rates unless it’s a dealer-subsidized lease.”

Checking your credit reports at least a month before you plan to start shopping is ideal, since that will give you time to dispute and fix mistakes. While you are at it, check your free credit scores as well (you can access them using a free tool, like Credit.com’s Credit Report Card). You will get an idea of where you stand and whether there are potential issues with your credit.

What kind of credit scores are required to qualify for a lease? “(If) you do have good credit it really unlocks the door to the best lease deals. You’ll be able to take advantage of some of the lease specials,” says Edmunds.com Consumer Advice Editor Ron Montoya.

In addition, it may be easier to qualify for a lease than a loan on certain vehicles, at least when it comes to your credit scores. The make and model of the vehicle you choose will also affect your options. Experian Automotive found, for example, that the average credit score of someone who took out a loan for a new Jetta in the fourth quarter of 2014 was 716, while the average credit score for someone leasing one was 692. But for someone driving a new Grand Cherokee, the average credit score for a loan borrower was 735, while the average credit score for a lesee was 728.

 average credit score

2. Know Your Cash Flow

One of the distinct advantages of leasing is that it may allow you to pay less per month than if you financed the same vehicle. According to Experian Automotive, the average monthly payment for a new lease was $420 in the fourth quarter of 2013, and the majority of leases (66%) were for a 24- to 36-month term.

But your lease payments may be lower than a loan payment for a similar vehicle. For example, the average lease payment for a Jetta was $287 while the average loan payment was $389. And for a Grand Cherokee, the loan payment averaged $611, compared to $470 for the lease payment.

  average payment

Keep in mind that these monthly payments don’t take down payment or trade-in into account. And if you lease, you’ll either have to turn in the vehicle or purchase it when the lease term is up. “Consumers need to fully understand any potential cost on the back-end and be sure they can meet the terms of the lease – such as mileage limits and wear and tear,” says Melinda Zabritski, senior director of automotive credit for Experian Automotive.

3. Don’t Just Shop for a Car, Shop for a Lease

Unlike auto loans (which are available from a variety of sources including banks, credit unions, dealers and even online), leases today are largely controlled by the manufacturer. “Nearly all leases are done on a captive basis,” says Hall. For example, “Ford Motor Credit Company does most of the leases for Ford vehicles.”

That means you may be able to get a better deal if you are flexible and willing to consider a vehicle from a different manufacturer.

In addition to credit, the company offering the financing will look at your debt-to-income ratio and the “lease-to-value” ratio – in other words, how much you are financing compared to the value of the vehicle, says Hall. If you are having trouble qualifying, you may need to put additional money down or get a co-signer, he adds.

The good news is that most people who apply for a lease qualify for one. Lease approval rates during the month of January were above 70%, according to SwapALease.com. Though that’s down from 73% in December of 2013, it’s up from September 2013 when a little more than 62% of applications were approved.

And there’s still another option: If you’re not ready to commit to a two- or three-year lease, you can consider taking over the remaining term on someone else’s lease. As long as your credit is in the same “tier” or better than the person whose lease you are assuming, you shouldn’t have much trouble qualifying, says Hall. Sites like SwapALease.com and LeaseTrader.com help bring together consumers who want to get out of leases and those who want to assume one, and allow you to try out leasing without a longer term commitment.

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