Lease to Own Car: How It Works

A lease-to-own car program acts as an agreement between a leasing company or dealership and a lessee. In this agreement, the lessee pays on a set schedule to lease the car within set terms. Lessees can apply all or some of their payments to the car’s purchase price. When the lease expires, lessees can purchase the car or walk away. 

Lease-to-own car programs are also called “rent-to-own” since you essentially rent the car for an extended period. If you know how leasing a car works, lease-to-own programs offer the benefit of stacking up equity you can use directly to lower the car’s purchase price. This arrangement isn’t always possible with a traditional lease. 

Lease-to-own works off the same template as most car lease agreements, with set terms (such as mileage restrictions) and penalties for exceeding these terms. A lease-to-own program typically lasts two years but can extend to five years (similar to how long a lease on a car is). Unlike traditional leases, lease-to-own car programs delay financing charges, property taxes, and additional fees if and until the lessee decides to purchase the car. 

The best car leasing deals offer low payments and the chance to test-drive a car for a few years before buying it or moving on. Lease-to-own programs provide a similar agreement, with payments made weekly, bi-weekly, or monthly during the lease terms. However, lease-to-own car program requirements vary. 

Most leasing companies or dealerships that offer lease-to-own programs handle financing in-house, typically without a credit check. Instead, you must provide proof of: 

• Identity
• Residence
• Citizenship
• Income 
• Car insurance

Depending on the leasing company's requirements, you may be required to put down money. Some dealerships also restrict lease-to-own car programs to used cars, excluding new vehicles from the picture entirely. Dealers also often install immobilizer devices in lease-to-own cars to render them unusable if you miss a payment or default on your lease agreement. 

Unlike a traditional lease, lease-to-own programs allow you to put some or all of your lease payments toward purchasing the car. With a conventional lease, you cannot apply your payments to the purchase price, as they are specifically designed to cover the depreciation costs incurred by the dealer through leasing the car. While traditional leases can offer positive equity if the residual value is less than the current market value, that equity is only realized if you can buy out the lease and sell it. 

Lease-to-own programs also require little or no down payment and potentially lower payments than if you were financing. Interest rates can be higher than the money factor you qualify for with a traditional lease, but leaving credit out of the picture can make a big difference. However, terminating your lease-to-own car program before the lease expires can still result in early termination penalties. You’ll also lose any equity you’ve built and the opportunity to purchase your leased car. 

Most lease-to-own car programs benefit those with poor credit the most. Removing the need to pass a credit check allows lessees the chance to get behind the wheel and own a car at the end of the lease terms. However, these opportunities come with caveats, some of which can be cost-prohibitive. 

Lease-to-own car programs restrict eligible cars to used only. Purchasing used can save you money since you don’t face the significant depreciation new cars experience in the first few years. However, maintenance costs still fall under your responsibility since most lease-to-own cars aren’t covered by warranty. In addition, you can’t modify your car until you own it on paper. 

Not all lease-to-own cars are treated the same. These cars have probably been leased and repossessed once or twice. While that’s not always the case, it’s an important consideration, especially knowing you are making payments on an investment. If that investment doesn’t pan out, it could all be for naught. 

As tempting as avoiding a credit check can be, lessees also lose the chance to report their payments to one or more credit bureaus to raise their scores. Car payments can boost your positive payment history and demonstrate good credit behavior. At the same time, similar to if you were to end a car lease early, terminating a lease-to-own program early due to financial changes wouldn’t affect your credit. 

Lease-to-own programs also incorporate the risk of overpayment and steep penalties for missed payments. Besides higher interest rates, lessees must contend with penalties and fines if they pay late. Dealerships can charge towing fees and a fine for deactivating the immobilizer device. Making a late payment or missing one can also void your agreement and reset the clock. 

Example lease-to-own car program

Consider a lease-to-own car program on an Audi Q5 that’s worth $30,000 used. A four-year lease-to-own contract may offer $300 bi-weekly payments for a $600 monthly lease payment total. With no credit check or down payment required, you’d pay $28,800 of that retail price by the end of your lease term. A balloon payment of $1,200 (plus any titling, licensing, and taxes) would pay off the remaining balance, allowing you to drive off the lot with a car you own outright. 

If you were to finance this Audi Q5 for $30,000 for the same term (48 months), you would pay $775 monthly with an 11% interest rate. Bump that to 15% interest, and you’d be looking at $835 monthly. You’d still own the car after paying it off in four years but pay thousands of dollars in interest compared to a lease-to-own program. However, financing does offer certain perks you can’t necessarily get with a lease-to-own car program.  

A lease-to-own car program often comes as a last resort for those who need a car to drive but have yet to find or qualify for traditional financing. Like buy-here-pay-here dealerships, lease-to-own car programs certainly give consumers a leg up when their credit is low. However, the disadvantages often outweigh the advantages in most cases. 

The risks of agreeing to a lease-to-own car program can be unforgiving at best. Even making a payment less than 24 hours after the original due date can immobilize your car. In addition, your right to put your payments toward the purchase price disappears. Any new lease-to-own contracts may incorporate a down payment when there wasn’t one before and any additional mitigating factors necessary to balance out your newly perceived risk. 

Unless it’s truly your last chance at a car, lease-to-own car programs often present more risk than reward. Compared to many alternatives, the high stakes of lease-to-own programs rarely benefit you. Even subpar financing deals can give you additional options to come out ahead without risking your investment. 

If you’ve decided lease-to-own car programs aren’t suitable for you but still need a car, check out a FINN car subscription. These subscriptions offer monthly payments incorporating maintenance, registration, insurance, and depreciation. Even if you have poor credit, FINN only requires a security deposit. FINN makes it convenient to choose from a wide selection of cars and have your subscription delivered right to your door.