Can You Prepay A Car Lease With Bad Credit?
When dealing with car financing options, one question that I encounter more than most would expect is: can I prepay a car lease with bad credit? The simple answer is yes.
This type of transaction is known as a single payment car lease or a prepaid car lease. The question is not so much can it be done, but will it be beneficial in the long run.
While a transaction like this seems to be pretty straightforward, it is always best to examine financial transactions from a number of perspectives to ensure that you end up with the type of situation you are looking for.
While single payment car leases are generally reserved for individuals who desire to lease a car and have the surplus of cash on hand — primarily for the purpose of saving money — it is possible for a person who may have poor credit to use this as a method of avoiding being denied through traditional financing models.
If you have poor credit and you want to lease, your options may be limited to a single payment car lease; however, it is best to examine the process to make sure that such a substantial investment will be in your best interest.
Leasing is Not Owning
A lease does not create ownership, and you should always question large expenditures in which you will not be purchasing an asset. A number of variables will have to align themselves to make paying for a lease upfront a worthwhile investment.
First, the existence of poor credit is generally related to a problem with cash flow, and if the cash flow issues have not been resolved, becoming involved in a single payment car lease can have some drawbacks worth considering.
If there is a cash flow problem, and you are using a one-time cash windfall to pay for the lease, you must consider what you will do at the end of the lease, when you either have to make a balloon payment, refinance the vehicle or return it.
Will Prepaying a Car Lease Save Money
It is possible, and even likely, that a prepaid car lease will save money — primarily in accrued interest, especially if you have poor credit. One reason that people prefer leasing over buying is the lower payments over a shorter period.
You are able to buy into the use of a vehicle for lower payments and you are not tied to the car for five years or longer.
It is important to understand that prepaying a lease is different that prepaying a loan.
Because a car lease is structured differently than a loan, there will still be finance charges applied to the lease, even if you pay the entire lease up front.
You will be able to eliminate some of the charges, but not all.
Additionally, prepaying a lease eliminates one of the primary benefits of leasing in the first place — freeing up hard cash that would be used for a car payment to be used elsewhere.
How Prepaid Car Leases Are Structured
It is worth noting that different finance companies can structure the way that they do their leases differently.
Currently (2016), there is no standard method that is used by all finance companies, meaning that you will have to compare the different methods being used by companies you are considering working with.
- Prepaid Lease Method 1: Method one allows you to prepay for the depreciation of the vehicle over the duration of the lease, the sum total of the monthly payments and any sales tax. This is a model that is a great deal for you, but not for the leasing company.
- In this instance, unlike a loan, you will not be required to pay the full value of the car. You will only pay interest on the depreciation of the vehicle, and not on the residual portion. So, with this method, you save on much of the finance costs.
- Prepaid Lease Method 2: This particular method is the most common method offered by leasing companies — primarily because it is more profitable for the leasing company. Additionally, this model is much easier to compute than the first.
- With this model, the monthly payments are calculated as if the lease were going to be paid off monthly — meaning that there will be a zero cap reduction in the deal. You will simply pay off the total monthly payments up front, producing no cost savings for you, either in sales tax of finance charges.
Remember, at the beginning of the article I stated that the simple answer to the question of can this be done with bad credit was yes; however, that is the simple answer.
The complex response to the same question is a good credit score is normally still required to be approved for a single payment car lease.
The reason that your credit score will still play a role in the approval process is that a prepaid lease is still considered a credit transaction, because the full value of the car has not been paid off.
With that being said, there are situations in which the lump sum payment can be substantial enough to convince the leasing company to take a risk.
It is also worth noting that prepaying a car lease does not serve to boost your credit score since there will not be regular payments being made, but there is no chance of it hurting your credit either, since there will be no late or missed payments.
This transaction will also remain on your credit as a debt obligation until the car is paid off at the end of the lease or when the car is returned.
Where you may save money is in the area of a reduced interest rate.
When it comes to leasing, a prepayment is basically viewed as a huge down payment, which, in most instances, results in a lower interest rate because of the immediate equity created by the payment.
Another way that you can save money in this process is by negotiating the best possible price before beginning the leasing process. When taking the leasing route, even a minimal price reduction has an immense effect on the final payout.
When determining if prepaying a car lease is worth it, it will have to be something that you decide, based on your personal needs and expectations.
Each situation is different, and there is no right or wrong answer. It is more about what is right for you.