Car leasing with bad credit: options including PCP

Affordable payments despite a poor credit score: PCP finance can provide an alternative to car leasing with bad credit

BuyaCar team
Sep 27, 2019

If you're looking for a brand new car, then leasing is one of the easiest ways to get behind the wheel for a reasonable monthly cost. Payments are kept low because you effectively just rent the vehicle - usually for between two to four years. Then, like a holiday hire car, you simply return the car at the end.

As you're not buying the car, the total amount that you pay is usually much lower than the car's cash price. Just like with PCP finance, the better a car retains its value as it gets older, the lower your monthly payments will be. The downside of leasing is that you'll normally need a strong credit rating to be accepted, and you are left with nothing to show for your payments at the end. Even if you love the car and want to buy it, that's not normally an option, either.

Meanwhile, if you have a poor credit rating, or just one that's lower than average, then affordable leasing may not be available. However, this doesn't rule out a similar type of arrangement that also provides you with relatively low repayments and the option to return the keys at the end of the contract: PCP finance.

Leasing alternatives: PCP finance

Personal Contract Purchase (PCP) finance offers a similar format to leasing, as you make an initial payment followed by a series of monthly payments, but it's available for used cars as well as new models. This means that PCP can provide even lower monthly payments than going for a lease deal and you have a much wider selection of cars to choose from.

The reason PCP instalments are lower than an equivalent loan or Hire Purchase deal is that they only cover part of the vehicle's cost - the amount the car is expected to lose during the contract - making PCP surprisingly affordable. At the end of the contract, you can hand the car back and walk away, just like a lease.

However, PCP is more flexible than leasing, as you also have other options at the end of the agreement. You can buy the car for a pre-agreed amount (known as the optional final payment or balloon payment) or if you don't have the cash to hand you can refinance this, automatically owning the car once you've completed this second set of payments.

If the car is worth more than the optional final payment when you hand the keys back then you’ll also be able to cash in this difference - known as equity - by putting it towards a deposit on another model. This in turn, reduces monthly payments on your next car.

Leasing and finance repayments with bad credit

You’re more likely to be accepted for a PCP agreement than leasing if you have a low credit score because PCP is a full finance agreement where interest is charged, which means that lenders can adjust the rate to reflect their risks. 

As a result, interest rates will be higher if you have a low credit score and you’ll normally be required to pay a deposit. This isn’t a bad thing if you have the money: the bigger the deposit, the lower your monthly payments will be and the less interest you'll pay overall.

As with any type of finance or leasing, lenders will check to ensure that payments are affordable, alongside all of your other essential costs, such as rent or mortgage payments.

Affordable PCP finance with poor credit

Your PCP finance payments are based on the amount of value that your car is expected to lose during the agreement. So if you buy a car that holds its value well, such as the Mini Hatchback above, then this will reduce your repayments compared with a car with the same cash price that is less desirable used - and consequently loses value faster.

The example monthly prices shown on BuyaCar are representative examples, based on a typical interest rate; if you’re borrowing with poor credit, then the cost is likely to be higher. Select 'Poor' in the credit rating section on the finance calculator at the bottom of BuyaCar cars for sale pages - or have a look at the finance calculator below - for a more accurate idea of what you can expect to pay.

Meanwhile, if you want to read more about the different types of cars available, check out our used car buying guides.

Leasing a used car with bad credit

Most leasing arrangements are restricted to new cars, but PCP finance is available for both new and used vehicles that are typically less than four years old.

This provides far more options with a greater range of cars to choose from, across a wider price range. Older models are available to finance, too, but for cars over five years old you’ll normally need to spread the cost with Hire Purchase (HP) finance, which will result in you owning the vehicle once you've completed the monthly payments.

Don't see this as a bad thing, however. You can always trade in your car for a new one at the end of the agreement if you want, putting the car's value towards a deposit on your next car, reducing your monthly payments.

Improving a bad credit score with leasing

Successfully applying for PCP finance and making your monthly payments on time should improve your credit score, which may help you to lease a car or take out finance at a lower interest rate in future.

Credit scores are meant to reflect the risk that lenders take when they offer you finance, so a strong record of making payments on time will normally result in a higher score, as future lenders can be more confident that you will pay them back on time.

Other factors that affect your credit score include County Court Judgements, bankruptcies and the length of time that you have lived at your current address. The more stable your situation is (for example, living at one address for a long time, having a permanent job and appearing on the electoral roll), the more creditworthy you are likely to be - and the more likely you are to be eligible for lease deals or lower interest rate finance offers.

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