With both your home and your car, you have to decide between buying – usually by taking out a loan – and leasing or renting. In the first case, you gain equity in an asset, even though this can be a slow process. When leasing or renting, you don’t end up owning anything, but you may also be able to afford to drive or live in something better. Whichever road you choose, how successful you’ll be at getting approval depends heavily on whether you have bad credit.
Raising your credit score is a long-term project and will indeed affect your decision to buy a car vs. leasing it. First things first, though: while building credit is undoubtedly a factor to consider, it’s not the only thing that matters.
Is Leasing a Car a Good Idea?
One of the best features of leasing a car is that you can expect lower monthly payments. This is because a car loan covers the entire value of the vehicle. In contrast, a car lease only accounts for the depreciation expected during two or three years, which is the period over which a typical lease for cars runs. When you terminate this contract, you can easily switch to a new car on a new lease.
On the other hand, your car lease will specify a maximum number of miles you can drive per year. If you exceed that distance or the vehicle gets damaged, you may be on the hook for some steep penalty charges. Even if you’re careful, a car’s leasing costs add up to more than buying a car if you look at it over five to ten years – the monthly payments may be lower, but a car lease leaves you with nothing to sell or trade-in once the lease has expired.
Finally and possibly most significantly, a low credit score makes leasing a car more difficult. The same, of course, is true for buying a car, but someone with a bad credit report may find leasing a car next to impossible, even if they earn a good income.
Can Leasing a Car Improve Your Credit?
A bad credit score is a severe drawback, affecting everything from the monthly payments on a leased car to the interest rate on a new credit card. But what is a credit score really, how is it calculated, and how does leasing a car figure into it all?
Your credit score is a summary of your full credit report expressed as a number. A credit score of 600 or below can be considered bad if your purpose is to lease a car. 700 is so-so, and someone with a score of 800 can qualify for better terms and more affordable monthly payments. Credit bureaus generate this score: companies that deal with financial information on individuals. Whenever you fail to make apartment lease payments, apply for a new credit card, or buy a new car using an auto loan, that transaction is reported to a credit bureau, which adjusts your credit score up or down.
How Credit Scores Work
A bad credit score is usually the result of things like late bill payments, bankruptcy, or defaulting on a lease. You can repair it by:
- Earning an income that’s much higher than your monthly debt payments,
- Conversely, reducing your debt burden and the interest on it, for instance by consolidating your credit card debt,
- Making all payments promptly and in full,
- Being approved for a high credit ceiling – like your credit card’s limit, or an overdraft facility on your checking account – but only making use of a fraction of this amount.
In other words, the only reliable way to build your credit score is to be a responsible consumer, consistently doing the right things, and showing new creditors that you’re unlikely to leave them hanging. Other than that, you can more or less do whatever you would have if you didn’t care about your credit score at all, including leasing a car and getting an additional credit card – as long as you know that you can make the payments.
How Does a Car Lease Show up on Your Credit Report?
A credit score is all about numbers, codes, and classifications; it’s calculated by a computer with only limited human intervention. Your intentions and whether you missed some payments due to simple bad luck does not affect your credit score.
Fortunately, enough people decide to lease a car instead of buying for this kind of transaction to receive special treatment from credit scoring agencies. As far as their algorithms are concerned, a car lease works just like an installment loan. In terms of your credit score, it’s as if you’ve taken out a mortgage or personal loan.
This will generally work in your favor, but beware: missed payments will also ding your score just as if you were late paying off a loan on the car. If you lease a car that’s really beyond what you can afford, you may end up with worse credit than before, especially if you’re forced to default on the lease. If this is in danger of happening, you should put the lease on the market before missing payments.
What Kind of Credit Score Is Needed to Lease a Car?
Different car leasing places have different requirements for people interested in obtaining the lease of a car. Even so, going forward in 2020, you can count on more people with low credit scores trying to lease both new and used vehicles, making it much more difficult to lease a car with bad credit.
In general, you will be able to lease some kind of vehicle as long as your credit score is 650 or over. Bad credit will, unfortunately, restrict your options in terms of what you can lease, how much wiggle room you have when negotiating the lease agreement and can also compel you to make higher monthly payments. Factors like these may send you back to the drawing board and cause you to reconsider your decision on whether it’s better to lease or buy.
Car Leasing: Snakes and Ladders
Should you decide to lease in any case, here are a few things to consider:
- Leasing a used car from an independent dealership may work out cheaper, but doesn’t necessarily improve your FICO score. Before signing anything, make sure that your timely payments will be reported to all three major credit bureaus: Experian, Equifax, and TransUnion.
- The monthly lease payment is probably the most important number on the contract, especially if your goal is to improve your credit score: the lower the payments, the more likely you are to keep up with them. Car leasing is about more than that, though. Asking someone to co-sign the contract or offering a larger down payment makes you more likely to be approved for a lease regardless of your credit history.
- Leasing a car is often a short-term solution to your driving needs, but you may also want to think of leasing to buy. If this provision is included in your contract, you have the option to purchase the vehicle at the end of the lease period for a price determined in advance. Though getting an auto loan, to begin with, is cheaper, this allows you to apply part of your lease payments to purchasing a car.
Car Leases and Your Credit Score
You may have thought that studying math was a waste of time while you were in school, but actually running the numbers is often the only way to weight the pros and cons of any financial decision. What effect carrying a car lease will have on your credit score may be an important consideration, but it’s far easier to calculate the effect on your monthly budget. Assuming that you spend responsibly, taking care of one will pretty generally result in improving the other, perhaps by leasing rather than buying to take advantage of a lower monthly payment.
It’s also important to look ahead and have a plan for when the lease comes to an end. While leasing and buying are effectively the same things as far as your credit report is concerned, buying gives you more options. Once the auto loan is paid off, you’re free to trade in the vehicle for a more expensive model, sell it outright or keep driving it. Unless you have some money for a down payment saved up by then, your current lease ending will usually mean having to look for a new auto lease.
We hope that the above information has helped you understand this choice better. If you have anything to add about how leasing a car can impact your credit score, please do so in the comment section below.