What Does Leasing a Car Mean?
It’s time to get a new car. Your old one isn’t going to cut it anymore, so you’re ready to move on. You can get a car loan and buy one, but you’ve heard that leasing is a good alternative. Maybe you’ve got your eye on a car just out of your price range, or maybe you get tired of driving the same car for too long. There are plenty of reasons to lease a car, but let’s start at the beginning. If you do lease a car, what exactly are you getting yourself into?
What is a Car Lease?
Leasing a car allows you to pay for only part of the car’s worth. Instead of paying the full price in monthly installments like with a car loan, the dealership will charge you the difference between the car’s current worth and its expected worth when your lease ends. This allows you to afford more expensive cars than you’d usually be able to, but you won’t have an asset to sell off at the end of the lease, which is usually around three years.
Instead, you’ll have to turn in the car to the dealership and repeat the whole process over again.
How Does Leasing a Car Affect Your Credit?
In order to lease a car, you typically have to have better credit than if you were just buying the car outright. That’s because lenders are trusting you with an asset (the car) that they want to be able to sell later. You’re a safer bet if you have good credit, so it generally requires a credit score of 600 or more to qualify for a lease.
However, how it will affect your credit score afterwards is a little more tricky. On one hand, leasing a car will require an inquiry on your credit report, and your FICO credit score will typically drop slightly if you have too many inquiries in a short period of time. Especially if you apply to lease several cars before deciding on one, this could hurt your credit temporarily.
Part of your credit score is based on what kind of debt you have, and diversifying your accounts will boost your score. So if you only have credit card debt, for example, leasing a car can definitely help your score. Additionally, fulfilling your monthly lease payments will display reliability, and your score will improve same as if you consistently paid on any other bill.
Learn more about your credit score at our credit score resource center.
Can You Get Out of a Car Lease?
Yes, you can get out a car lease. However, it is not easy, and it will probably cost more time and money than it’s worth. There are a few options.
- Oftentimes, you can transfer your lease if someone else is willing to take it on. You will probably have to pay a special transfer fee; check the terms of your lease contract before you move forward with this option.
- You can buy the car outright from the dealer. There will be an additional buyout fee, but then the vehicle is yours to sell if need be.
- Trade in your vehicle. If you just want a different car, most dealerships will allow you to roll over your lease onto a different vehicle. Your monthly payments will fluctuate depending on the value of the new car, and you will also have to pay an additional fee.
- Negotiate with your dealership. The above options are decently standard, but depending on your situation and your relationship with your dealer, you might be able to negotiate delaying a few payments, extending the term of your lease, or lowering the payment temporarily.
Getting out of a car lease early is deliberately made difficult and expensive, because it’s in the interest of the dealership to hold you to the contract. As such, almost every option will incur some sort of penalty. However, just because it is a difficult process to get out of does not necessarily make it a trap. Leasing a car is the perfect choice for some people, especially if their taste exceeds their budget or if they just don’t want to commit to the same car for a long time. Regardless, it is not without risks. What leasing a car means is ultimately up to your financial situation and personal preferences.
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Dayton is a chronic Wikipedia addict, which is detrimental to her social life but stellar for her writing. She resides in Boise, ID, surrounded by her own frantic outlines, highlighted encyclopedias, and potatoes. The latter was not by choice.
This post was updated February 28, 2019. It was originally published December 21, 2017.