Can I Lease A Car Without Having 'Top Tier' Credit?
The deals we write about on Leasehackr generally require ‘top tier’ credit — a FICO score of 700 or higher. (For reference, the average FICO score for U.S. adults is 711.)
However, millions of Americans do not fall within this range. Is it possible to lease a car without stellar credit?
Well, first, we recommend that folks assess their financial situation to see if leasing a new car is the right decision. There are many alternatives to purchasing or leasing a new car — for example, buying a reliable used car or not owning a car altogether.
But if your credit score reflects your past finances rather than the present, you have the income and savings to pay for the car, and you’re seeking to build your credit history, then, yes, leasing could be a decent option. Just expect to pay more than someone with Tier 1 credit.
For the purposes of this article, we’ll be talking about Tier 2 and Tier 3 credit (generally, a FICO score between 600 and 700), rather than sub-prime credit (a FICO score below 600), which is a whole different ballgame.
Your Credit Score Affects the Money Factor, Nothing Else
The main difference between Tiers 1, 2, and 3 will be the Money Factor on the lease.
The Money Factor (MF) is essentially the interest rate on the lease, but expressed in a different manner. To get the equivalent Annual Percentage Rate (APR), simply multiply the MF by 2400. For example, a car lease with a MF of 0.00100 has an APR of 2.4%.
Every month, the lender sets the MF for each vehicle model they lease out. Most leases are financed through the captive finance arm of the automaker (e.g., Toyota Financial Services for a Toyota lease), but there are non-captive lending institutions that offer leases as well.
The MF will vary depending on your credit tier. As an example, below is a table showing the different rates for a 2021 Toyota Camry lease through Toyota Financial Services this month, ranging from a MF of just 0.00001 for Tier 1+ credit to 0.00146 for Tier 3 credit.
The MF rates on this table reflect the “base rate” or “buy rate” that the lender offers to the dealer for a Tier 1+ through Tier 3 customer. Dealers are known to further mark-up this buy rate for additional profit. For example, Toyota Financial Services allows dealers to mark-up the buy rate by up to 0.00040 (0.96% APR).
Inflated MF rates drive up the finance charge of your lease, increasing your monthly payment. We recommend that you insist on the buy rate offered by the lender for your respective credit tier — unless there is a corresponding discount on the vehicle selling price that offsets the marked up MF.
Additionally, if your credit score is close to the next credit tier, the dealership may be able to request a “tier bump” from the lender to qualify you for a higher credit tier. A tier bump from Tier 2 to Tier 1 could end up saving you a significant sum of money. This is at the discretion of the lender; your mileage may vary.
How Credit Score Affects the Lease Payment
The table below summarizes the impact that credit tier has on the monthly payment of a lease. We’ve calculated the estimated lease payments for a Toyota Camry based on the captive lender’s current rates and programs for this month.
| 2021 Toyota Camry SE - 36 Month Lease Example (TFS) | |||
|---|---|---|---|
| Tier | Rate | Monthly | |
| T1+ | 0.00001 | $252 | |
| T1 | 0.00011 | $256 | |
| T2 | 0.00056 | $276 | |
| T3 | 0.00146 | $310 | |
In this particular example, a lessee with Tier 3 credit (FICO 669-650) will pay $58 more per month on a lease than a lessee with Tier 1+ credit (FICO 720+), all things being equal. Multiplied over the course of a three year lease, the Tier 3 customer will pay $2,088 more in finance charges than the Tier 1+ customer for the same car.
Conclusion
Judging by these numbers, it goes without saying that having a good credit score is key to hacking a truly excellent lease deal. If you’re currently working on building your credit, expect to pay more on a car lease than a customer with Tier 1 credit.
That said, you should still approach your car shopping and negotiation the same as someone with top tier credit. The only variable in this situation would be the Money Factor, which is pre-determined by the lender for each credit tier. All the other parameters of a car lease, such as the selling price on the car, is still negotiable to the same extent — regardless of credit tier.
Before reaching out to a dealership, know your approximate credit score, as well as the buy rate and other program details of the vehicle you’re leasing, so you have a ballpark figure of what to shoot for.