A lease-to-own car program is usually an option which you can find at small used vehicle dealerships. It might also be advertised as a rent-to-own program for a vehicle. This option makes it possible for someone with significant credit problems to still find a way to get behind the wheel of a reliable car, truck, or SUV.
This program differs from the standard leasing arrangement you see at a new vehicle dealership since this offer requires a monthly rental payment to use a car that the dealer continues to own. You can then purchase the vehicle with a balloon payment at the end of your lease if the contract you sign allows for that transaction. When you choose a lease-to-own car, then you must purchase it or lose the investment.
When you choose this option for your vehicle, then the used car dealership will maintain the title of the vehicle over the lifetime of the arrangement. The buyer then makes a monthly or biweekly payment. Then you can drive off the lot in something reliable even if your employment history or financial track record excludes you from a traditional purchase.
Is a lease-to-own car program worth it? Here are the critical pros and cons of this financial transaction to review.
List of the Pros of a Lease to Own Car
1. You will not be paying any finance charges with a lease-to-own program.
If you decide to pursue a lease-to-own car, then you won’t need to worry about paying any finance charges during your rental period. Most dealerships who offer this rental program will not require you to pay any fees or property taxes during the contract either since they own the vehicle instead of you. That means you can get behind the wheel of your preferred vehicle today even if you don’t have a lot of money in your savings account.
This structure is why it can be advantageous to pursue a lease-to-own car if your credit score is below average. You might pay more in the long run, but you can meet your immediate needs right away.
2. Most used car dealerships will not require a down payment for this contract.
If you decide that a lease-to-own car program is the best way to bring a vehicle home in your situation, then you won’t need to worry about a large down payment. Most dealerships allow you to sign-and-drive without making a payment toward the leasing arrangement at all. Even when one is necessary, the costs are very low. You may need to pay these costs at the end of the contract period, but the goal is to be in a better financial situation in the future than you are today so that it becomes an affordable option.
3. The average contract period for a lease-to-own car is 24 months.
A lease-to-own car contract will require you as the buyer to make a lease payment each month or twice per month for about 2 years in most situations. Once you complete this rental period, then you will receive the title for the vehicle and become the owner of it. There are strict limits for on-time payments, so make sure that you don’t miss a single once because that can cancel your purchase option at the end of the lease. You would then lose all of the payments you have already made.
Unless there is a remaining balloon payment at the end of the lease-to-own car contract, you should own the vehicle without any other debt once you successfully satisfy the terms of the contract.
4. You are supporting a local small business with this transaction.
Because the lease-to-own car programs are almost exclusively run by used dealerships which are independently owned and operated, you are supporting the local economy when you purchase a vehicle in this way. It is an option to buy close to home, and then pay at home as well. Although there are some terms that could be potentially dangerous to your financial situation, a well-managed contract can be advantageous because you’ll get a better car than you would be able to afford through the traditional lending process.
Since 78% of your funds go back into the community after a transaction like this, there are indirect benefits that could eventually help you see your standard of living rise when others take advantage of a similar offer.
5. If your financial situation changes, then you can return the car.
In most lease-to-own car agreements, you will have the option to return the vehicle if you can no longer pay for it. Your credit score won’t drop in this situation since the dealer is not reporting your payments to the local credit bureau. Although you won’t be able to improve your credit score either, a long period of unemployment won’t cause you extreme financial difficulties with this arrangement if it is possible.
That means you must read the fine print of your contract before agreeing to anything. If you are unable to return the vehicle if you can no longer pay for it, then the dealer might immobilize it while continuing to charge your monthly rent. Early termination will also result in a forfeit of your down payment unless there are extenuating circumstances to consider.
6. You will get to own the vehicle at the end of the contract.
If you fulfill all of the terms of the rental agreement with a lease-to-own car, then you will become the owner after you make the final payment. That means the title (and its responsibilities) will transfer over to you. This outcome is not possible with the typical lease arrangement unless you can arrange for a balloon payment to cover the final expenses. You even get to experience this advantage despite the fact that a credit check is not usually required to initiate the agreement.
List of the Cons of a Lease to Own Car
1. There is a significant risk of overpayment with a lease-to-own program.
When you decide to follow the terms of a lease-to-own car contract, then you have a 99.9% chance that the agreement will have you overpay for the vehicle that you choose to purchase. The payments are often higher than they are advertised when you see this option available on TV or in other marketing materials, and then there are fees that you must consider as well when you make the monthly payments.
Investopedia offers the example of a subprime borrower pursuing a $10,000 vehicle that was probably purchased for $5,000 at auction. Between the weekly payments and the down payment requirements, you’ll eventually pay a 100% mark-up on the original cost plus any rental fees.
2. You can lose the vehicle if you miss one payment by a single day.
The lease-to-own car contracts are very strict in their definition of a default. You must make your payments on-time, every time if you wish to maintain use of the vehicle. Failing to make your payment can trigger a repossession immediately, even if you are only 24 hours late on the transaction. That means you would lose any payments that you already made toward the purchase price and the right to use the car to meet your needs.
Some used car dealerships use an immobilization device on the vehicle that they can initiate when your payments are late. Since they are the owner of the car, the only defense you have is a receipt that shows you made the payment on time if the vehicle fails to start from this issue.
3. Most subprime loans are cheaper than lease-to-own arrangements.
Unless you have a credit score below 600 or no verifiable employment, there is an excellent chance that you would qualify for a subprime vehicle loan. Use a traditional lending product can save you a significant amount over the lifetime of the contract you sign.
If you bought the $10,000 vehicle using a subprime loan, then your monthly payments would total $11,844 over the life of a three-year agreement using the average rates from May 2019. The cost of the rent-to-own program would be $13,700. Although that doesn’t seem like a significant difference to some, the reality of a low-income family is that you can save about six months’ worth of groceries by staying away from this type of program.
4. There are several fees that you must pay with a lease-to-own program.
If you happen to be late with one of your payments and the dealer places an immobilizer on the vehicle, then you will need to pay fees to turn off the device to start driving once again. You’ll need to pay the cost of towing if there was a repossession that took place as well. That is assuming you didn’t lose the right of possession in the first place after missing a payment deadline.
If you do have the lease-to-own car contract canceled because of a late payment, your dealer could allow you to make another down payment to enter into a new two-year agreement. Some might decide to restart the time terms if you had a no upfront cost option. That is why it is critical to always make your payments on time.
5. Most dealers do not report your payment history to the major credit bureaus.
Although the lease-to-own car agreements can help individuals who have employment or credit struggles to find a vehicle that can meet their needs, the payments that you make each month will not improve your overall score. Most dealerships do not report your payment history to the major credit bureaus. Even if you asked them to do so, there is an excellent chance that they would not. That is because this transaction doesn’t involve any financing. You are essentially paying rent on a car as you would an apartment.
6. You do not hold the title to the vehicle.
If you decide to follow the lease-to-own car program at your local dealership, then you will become the owner of the vehicle after the rental agreement terms conclude. You do not have the same ownership rights until that moment. Even though that means you probably won’t pay taxes on the car, you won’t have ownership of the title either. That means you are unable to sell it should the need arise.
Because the lease-to-own car contract is a binding agreement, you have no way to break the terms of the contract if you no longer need the vehicle for some reason. You could return it to the dealership, but they could hold you responsible for whatever remains on arrangement or send you to a collections agency to retrieve it. That would worsen your credit profile since the collectors would report the balance.
7. The quality of the vehicle could be questionable.
A lease-to-own car contract looks to make the most money possible for the dealership while reducing as much risk in the arrangement when working with credit-challenged consumers. Most vehicles are structurally sound when pursuing this contract option, but there could be high mileage concerns. If the terms last for 24 months, then there is a chance that the vehicle could stop operating after you fulfill the agreement and force you to perform costly repairs or start another lease.
8. You must have valid identification to qualify for a lease-to-own program.
If you want to secure a lease-to-own car contract with a local dealership, then there are some criteria that you must meet as part of the application process. That usually means you must provide proof of identification, evidence of local residency, and some sort of income proof so that the dealer can see you have the means to make your requirement payments.
This disadvantage is present most often when someone or a household moves to a new community in a different state. Their identification might not yet be up-to-date, and they might not have any bills in their name that establishes their current residency. If you live in a motel or use a PO Box, then that might not be enough to qualify for this rental arrangement.
9. Some dealerships might require weekly payments.
It is not unusual for a lease-to-own car contract to require a weekly payment since this is a high-risk agreement. If you are paying $350 per month for the privilege of being in the vehicle, then that means you’ll own $87.50 on a specific day. Failing to make one weekly payment can be enough to terminate the rental agreement in some situations, which is why there is a lot of risk with this option. Some dealerships might not allow you to prepay either, so you may need to put the money aside at the start of the month and then pay at each due date to ensure there are no missed deadlines.
If you are late on a payment, then a $25 late fee is typically charged to your account. That can add up if you miss multiple payments during the year. Watch out for the rental fee costs with this arrangement as well.
10. You may be responsible for repairs even though you are not the owner.
It is not unusual for the terms of a lease-to-own car contract to include repair responsibility for the driver instead of the dealer. If you don’t want this responsibility, then there may be additional warranties that you must purchase to ensure that you can continue driving the vehicle. These costs are not usually advertised or included in the monthly payments, which is why the expense of renting can be a lot higher than anticipated by many drivers.
You may also discover that a warranty on the vehicle is usually not included unless mandated by law. There are not any incentives to the contract either, which may be possible in the traditional leased car arrangement.
11. New cars are rarely part of this arrangement.
You might need to pay up to 10% of the purchase price of a vehicle in a lease-to-own car contract to drive it off the lot, which means $1,000 is necessary on a $10,000 car. Because of this structure and the fact that most rental agreements cater to the credit-challenged consumer, you almost never see new automobiles offered with this arrangement. That means you’re stuck with a used car, so it is up to you to bring a trusted mechanic to inspect it to ensure that it is mechanically sound.
12. Rental fees can be higher than subprime interest rates.
Although you won’t be paying interest charges when you opt for a lease-to-own car, there are rental fees that you must pay as part of the agreement. There are some cases when this expense is less than the interest of a subprime loan, but that is not always true in every situation. You will need to compare the cost of the rental fees to the payments of a subprime loan to see which option can put you ahead financially.
There may be times when you won’t qualify for a traditional loan, so the lease-to-own car is your only option. Because of this issue, renting should be the last option to consider instead of the first for many potential drivers.
Verdict on the Pros and Cons of a Lease-to-Own Car
A lease-to-own car contract is probably the final option to consider if there are no other choices available to you and a vehicle is necessary for your job or other responsibilities. Although this option can get you behind the wheel without a down payment in many situations, the risks of repossession are high. You will also pay a lot more over the long run with this arrangement even when compared to a traditional subprime automobile loan.
There are times when this arrangement is beneficial, such as when you need a guarantee that the car you drive is structurally sound. You might pay more for that privilege, but then you’re not the actual owner of the car until you fulfill the terms of the contract. If the car breaks down, then you can often walk away from the arrangement.
The pros and cons of a lease-to-own car are important to consider in the used market because the integrity of the dealership and the vehicles they provide will dictate your outcome. Always seek out reviews before initiating a transaction, ask for referrals, and don’t be afraid to walk away if the costs seem too high – because they probably are.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.