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Car leasing with bad credit

  • A guide to leasing with bad credit
  • Do you actually know what your credit score is?
  • How leasing can improve your credit score 

When you apply for a lease, for personal contract purchase or for hire purchase, your personal and financial history is investigated by the lender to make sure you can afford it.

This is called doing a credit check. In general, people either have a good credit score, or a bad credit score.

People with a high number (e.g. a good credit score) have demonstrated good control with their finances in general. For example, people with a good credit rating will rarely have missed a payment on anything. They have an income that exceeds their outgoings, can comfortably support another loan, have an unbroken employment record, and they won't have County Court Judgements (CCJs) either.

              

Volvo XC40 and Range Rover Evoque

From this, you can see what type of people fall into the bad credit camp. In addition, such people may have no bank account so cannot demonstrate a record of financial management, they may frequently go overdrawn or they may just be associated through marriage or address with someone who has a bad credit rating.

Making too many loan applications can give them a low credit score, too, since it appears to the reference agency and the lender as though the applicant has been refused finance or is borrowing too much money.

Something else that can contribute to a bad credit rating is, bizarrely, not having taken out many loans in the past. This gives a person what's called a 'thin' credit history. Basically, there's little for the lender to go on, so it assumes the worst. A person who would have a thin history is a young borrower applying for a loan for the first time.

All this being so, it sounds like someone deemed to be a poor credit risk or to have bad credit would find it impossible to lease a car. Fortunately, this is not so. By taking some simple but responsible steps, a person with bad credit can turn the odds in their favour and successfully apply for finance to lease a car.

Car finance deals:

Leasing with bad credit

Even if you have bad credit it is possible to lease a car. Here's how:

Check your credit rating

Examine your credit file to see if it needs updating or correcting. The three major credit reference agencies are Experian, Equifax and TransUnion. By law, you can check your rating for free but the agencies often bundle a check into other services and charge around £2. They operate checking services called CreditExpert (run by Experian), Clearscore (Equifax) and Credit Karma (TransUnion). Alternatively sign up to free checking services such as Moneysupermarket's Credit Monitor or Money Saving Expert's Credit Club. If you see any errors on your file, tell the reference agency. It will have 28 days to check your report and, if necessary, amend it.

Clean your file

Get your finances in order by settling loans if you can, closing redundant accounts and terminating questionable financial partnerships such as a joint account held with another bad credit risk. However, the effects of these actions can take some months to filter down and improve your rating.

Only borrow what you can reasonably afford

Demonstrating a realistic grip of your situation should improve your prospects of getting that finance deal.

Pay a higher interest rate

Following all these positive steps, if you're considered a reasonable credit risk, be prepared to be offered a higher interest rate than advertised. This is because a portion of the rate, called the money factor or lease factor, is worked in to reflect your status as a higher risk.

Pay a higher deposit

Again, you may be asked to pay a higher deposit that reflects your low credit rating. Car leasing with no deposit is rarely available.

Lease a lower value car

You may be offered a smaller pool of cheaper new or used cars in place of shiny, new premium models. Remember, though, that securing the lease is your goal since it's an opportunity to demonstrate financial responsibility, your reward being a higher credit rating and a better car next time.

PCP and PCH finance with poor credit

Renault Clios in a showroom

Personal contract purchase and personal contract hire require you to pay a monthly sum, but because you're financing only a portion of the car's total cost – although paying interest on all of it – the payments are reduced.

This should make securing a PCP or PCH deal with bad credit easier but there are still things you can do to improve your chances including, as we've explained above, checking and 'cleaning' your credit file, and getting your finances in order. In addition:

Choose a used car

Depreciation, or the difference between what the car is worth at the start of the deal and what it's worth at the end, is key to the cost of a PCP or PCH deal since it's this cash difference that you're financing. New cars lose well over half their value in their first three years and many lose up to 30% in their first year alone. It makes sense, then, to take out a PCP or a PCH on a used car that has already suffered much of its early depreciation. This will mean lower monthly payments that may be closer to what, given your credit rating, the finance company thinks you can afford.

Choose a lower annual mileage limit

Your projected mileage during the term of the deal is another factor in its cost. By opting for a lower mileage limit, the car will be worth more at the end of the deal, so costing you less each month to finance. Be realistic, though, because if you have exceeded the mileage, you will have to compensate the finance company.

Pay a larger deposit

You may have no choice but to pay a larger sum up front but doing so will reduce your monthly payments and the finance company's exposure, improving your chance of getting that PCP or PCH deal.

Pay a higher interest rate

You will probably be asked to pay a higher interest rate than the advertised one. It may only translate into a slightly higher monthly payment, though, so don't reject it without checking.

How leasing with bad credit can improve your credit score

There's only one way to get a good credit rating and that's to borrow money responsibly. It's like insuring a car. The longer you have insurance for and the better your driving record, the less you pay for it (at least that's the theory).

In borrowing money on a PCP or PCH deal and paying it back on time you're demonstrating that you can manage your finances. Everything else being in order, credit reference agencies will consider you to be a good risk. As a result, your credit score or rating will improve.

It won't happen over night. You must be able to demonstrate a consistent record of sound financial management. Some things such as county court judgements against you will take time to 'wash through', too.

Despite this, leasing as a bad credit risk is a good thing to do since it's taking that first step on the road to improving your credit rating and one day, being regarded as good credit.

Find out more about car finance:

This is called doing a credit check. In general, people either have a good credit score, or a bad credit score.