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Can You Lease-to-Own a Car – and Should You?

What is a lease-to-own agreement, and more importantly, is it a good idea? Here’s what you should know about this unique approach to car buying.

June 23, 2022

When it comes time to get a new car, most drivers assume that their only options are to buy a car with cash, finance their purchase or get a car lease. However, some dealerships also offer lease-to-own car programs.

Just like when comparing the pros and cons of leasing or buying a car, understanding how lease-to-own agreements work is key to helping you make the right financial decision for your situation. Here’s a closer look at what a lease-to-own program entails, how it differs from buying or leasing and how to decide if it is a good option for you.

What is a lease-to-own car agreement?

A lease-to-own car agreement isn’t like a typical lease agreement — it’s more similar to buying a car and getting an auto loan. The dealer holds the vehicle’s title while you make car payments until you’ve paid the car’s value in full. 

At the end of your lease-to-own agreement, you don’t do a trade-in with the dealer like you would with a standard lease. Instead, you gain full ownership of the car. The title and license fees are usually paid when ownership transfers to you at the end of the lease term.

While typical car loans and lease agreements require a credit check to determine your eligibility, they often aren’t required with a lease-to-own arrangement. The dealership handles all the financing itself rather than going through a third-party finance company. These agreements are typically targeted at buyers who have poor credit and might not be able to qualify for a loan or lease otherwise.

Because a credit check isn’t required to enter a lease-to-own car agreement, the payments aren’t reported to credit bureaus. As a result, your payment status on the lease-to-own agreement won’t help or hurt your credit score.

Specific aspects of the agreement tend to vary from dealership to dealership based on each dealer’s internal standards. For example, many require a down payment at the start of the agreement. In addition, car payments must often be made bi-weekly rather than monthly. This shortens the length of the lease agreement but could cost more on a monthly basis.

Most dealers only offer used cars or previously leased vehicles under lease-to-own programs. This practice helps account for the potential risk of entering an agreement with a driver who has poor credit. Unlike leasing a new car, however, these vehicles usually don’t have mileage limits, partly because much of the depreciation on the value of the vehicle occurs during the first few years of use.

Early termination of the agreement is possible, in which case you won’t have to continue making payments on the vehicle. However, you will forfeit the money you already paid as part of the lease agreement since you were essentially renting it up to this point. And you’ll have to return the car to the dealership.

When would you use a lease-to-own agreement?

Lease-to-own car agreements are typically offered to buyers with bad credit scores that would otherwise keep them from qualifying for financing or an auto lease with a third party.

A lease-to-own car agreement doesn’t need to be on your radar if you have good credit. You can use your credit score to qualify for more favorable lease terms on a new vehicle or get a lower interest rate when you finance a new or used car purchase. In addition, on-time payments with these agreements will continue to improve your score.

Essentially, drivers would typically opt for a lease-to-own agreement when a lender is unwilling to enter into a car loan to finance a purchase due to their credit score — or if the interest rate would be so high that monthly payments would become unaffordable. 

Similarly, a lease-to-own agreement might be the better option if a leasing company is unwilling to lease to you or the leasing requirements are too expensive because of your low credit score.

Pros and cons of lease-to-own car agreements

Lease-to-own car agreements can improve accessibility to vehicle ownership for individuals with bad credit. In addition, it removes the hassle of going through a credit check that might keep you from qualifying for traditional loan payments.

Since lease-to-own agreements typically only offer pre-owned vehicles, the car’s value likely won’t decrease as much as if you were to purchase a new vehicle. However, as with used car purchases, there is the added risk that excessive wear from previous drivers could leave you facing repair issues that the warranty no longer covers.

Because these lease payments might be bi-weekly, you would likely have lower monthly payments if you were to use traditional auto financing to buy a comparable used car. Bi-weekly payments can put added stress on your monthly budget, as this will likely cost more in the short term than making a single monthly payment.

That said, a lease-to-own car agreement will likely be cheaper than buying or leasing a new car, especially if you have bad credit. And after you finish the last required payment of the agreement, ownership of the car transfers to you. 

Like traditional auto financing, you will eventually reach a point when you no longer need to make monthly payments. After that, the car is yours to use as you please — whether that involves keeping it for many years to come or selling it.

It should also be noted that making timely payments on a lease-to-own car agreement won’t help you improve your credit score. If you can handle the higher interest rate, a subprime auto loan (which is typically offered to buyers with a credit score below 619) could help you improve your credit since your payment history would be reported to credit bureaus.

Because of these various factors, a lease-to-own car agreement is typically recommended as more of a “last resort” for obtaining a car. Before committing to this unique “rent to own” setup, it would be wise to look into other available lending options. You may be able to find cheaper monthly payments that also boost your credit score.


Find a car in a way that fits your finances

Bad credit or significant credit card debt can keep you from being able to afford the car you want. By paying down debt and improving your financial standing, you’ll be more likely to get a favorable interest rate the next time you’re looking for a new or used vehicle. And rather than needing to rely on a lease-to-own agreement to get a car, you can use traditional financing, which will be better for your credit score and your monthly budget.

If you’re ready to tackle credit card debt, the Tally† app can help. It manages your debt by combining credit card payments into a single payment plan. It also offers a lower-interest line of credit to help pay off high-interest credit card debt.

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.