Do You Need a Credit History to Lease a Vehicle?
A car lease is both similar and different than a car loan. A lease means that you're basically borrowing the car, while a loan means that you're purchasing the car. Both a loan and lease require some credit history. If you've made any past car payments, rent payments or anything where credit is involved, you have credit history.
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Credit Needed
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Unfortunately there's no magical credit score that will get someone approved for a car lease, although credit scores over 620 are more likely to get a person approved. A lack of credit history will be a problem, because if someone has no credit history, they likely won't have a credit score. Financial institutions consider leasing a car more of a risk than buying a car, which means the person leasing must show the financial institution that he has a history of repaying borrowers. If the potential lessee cannot show such proof, the financial instruction has no choice but to deny him the lease.
Interest Rate
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If a financial institution does offer a lease to someone who has very little credit history or poor credit, the interest rate on the lease will typically be above the national average. A lease interest rate is expressed as a money factor, which is a small number and bears no resemblance to a normal APR on a car loan. To find the APR on a lease, a person can multiply the money factor by 2,400. For example, if someone is offered a lease with a money factor rate of .001875, the APR would be 4.5 percent. According to bankrate.com as of January 29, 2011, the national average APR for a new 48-month auto loan is 5.16 percent, so the interest rate for someone with no credit history would likely increase significantly, to the tune of 3 to 5 percent. It's important to note that the average interest rate for auto loans and leases do not differ; they're nearly identical.
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Co-signer
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The financial institution may still approve someone with no credit history for a car lease if the person has a co-signer. A co-signer acts as a guarantee to the financial institution that the lease will be paid. If the person granted the lease does not make the specified payments, the co-signer must step in and make the payments. A co-signer must have good to excellent credit. A credit score of over 620 will usually suffice, although if the lessee's credit score is abysmal, such as 500 or below, the bank may want a co-signer with higher credit.
Upfront Payment
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Unlike a car loan, a down payment for a car lease is not required. However, if a person has poor credit or no credit history, the financial institution may request a down payment. The reason the financial institution would ask for a down payment is because a down payment minimizes the institution's risk of granting a lease to someone with no credit history. For example, a down payment of $2,400 minimizes any potential losses the bank would incur if the person cannot make their payments.
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