Leasing vs buying a car when your credit is poor

When you need a car and your credit is not great, you have two main paths: lease one or buy one. Both have real upsides and real downsides. Understanding the difference can save you a lot of money and stress.

What is a lease?

When you lease a car, you are basically renting it for a set time, usually two to four years. You make monthly payments, but you do not own the car. At the end of the lease, you return it or choose to buy it.

Leases often have lower monthly payments than a loan for the same car. That can sound great when money is tight. But there is more to the story.

What is buying?

When you buy a car with an auto loan, you are paying off the full price over time. Your monthly payment may be higher than a lease payment. But when the loan is paid off, you own the car. You can keep it, sell it, or use it as a trade-in.

Why leasing is harder with poor credit

Lease companies often set stricter credit requirements than auto lenders. Many lease deals you see advertised are only available to people with good or excellent credit. If your credit score is low or your credit history is thin, you may find it very hard to get approved for a standard lease.

If you do find a lease with poor credit, expect to pay a higher money factor. That is the lease version of an interest rate. A higher money factor raises your monthly cost even when the advertised payment looks low.

You may also need a larger security deposit or more money upfront.

The trap of leasing with poor credit

Leases come with strict rules. There are mileage limits, usually 10,000 to 15,000 miles per year. Go over that, and you pay a fee per extra mile. There are also wear-and-tear rules. Dents, stains, or worn tires can trigger extra charges when you return the car.

The biggest risk is breaking the lease early. Life happens. You may lose a job, move, or have a family change. Getting out of a lease early often costs thousands of dollars. There is no easy exit.

Buying may be the safer path

With poor credit, buying a used car through an auto loan often gives you more flexibility. The loan may be harder to qualify for too, and your interest rate may be higher than average. But once you own the car, there are no mileage limits, no wear-and-tear inspections, and no penalty for keeping it longer than planned.

Paying off a car loan on time can also help your credit score over time. A lease may do the same, but only if the leasing company reports your payments to the credit bureaus. Not all of them do. Ask before you sign.

Watch out for 'buy here, pay here' dealers

If traditional lenders turn you down, you may see ads for 'buy here, pay here' lots. These dealers offer their own financing and often skip credit checks. That sounds helpful, but the interest rates can be extremely high, sometimes 20 percent or more. The cars may also have hidden problems. If you miss a payment, some of these dealers can repossess your car very quickly.

If you use one of these dealers, get the car inspected by an independent mechanic first. Read every line of the contract. Know your state's repossession laws.

Steps to take before you decide

• Check your credit report for free at AnnualCreditReport.com before you shop.
• Get pre-qualified for an auto loan from a credit union or community bank before visiting any dealership.
• Compare the total cost of a lease versus a loan, not just the monthly payment.
• Ask any lease company directly whether they report payments to all three credit bureaus.
• If a lease deal sounds too good to be true, ask for the money factor and all fees in writing.

You do not need perfect credit to get a car. You just need to go in with clear eyes and the right questions.