When you're considering leasing a car, you may be wondering how it will impact your credit score. Car leasing has positive and negative effects on your credit rating, so it's crucial to understand both sides before making your final choice.
Car Leasing Impacts on Credit Score
Car leasing impacts your credit score in a few ways. It will show up on your credit report as an open account and affect your credit utilization which is factored into your score. Even though people are aware that their credit score might suffer because of leasing a car, cars have become essential without a doubt, and many are trying to find a way to get ahold of one.
Auto loan statistics show that the average monthly cost for a leased car is $452. But does a lease count as debt? Yes, since you need to make monthly payments that show up on your credit report as debt.
Does Car Leasing Show Up on Your Credit Report?
The monthly payments appear on your credit report when you lease a car. This is because it’s a financial agreement between you and the contractor.
Can Car Leasing Improve My Credit Score?
To anyone asking, ”Does leasing a car build credit?” the answer is that leasing a vehicle can positively impact your credit score and even help you rebuild your credit.
It’s important to note that when leasing, you’ll need to pay fixed monthly payments for the duration of the lease agreement (usually 24 to 48 months). As long as your leasing company reports to the three major credit bureaus and all your payments are made on time, an auto lease can certainly help build or establish your credit history.
Can Car Leasing Harm my Credit Score?
Car leasing can harm your credit score if you miss payments or default on the lease.
When you first sign the lease, you will see a slight drop in your credit score because of the new account you've just opened. But as long as you make regular payments, your credit score will get back to normal before you know it.
You could also experience slight hits on your credit score if you need to go through several inquiries on your credit score to get approved for the lease.
What if I Pay off a Car Loan Before the Lease Term Expires?
Does breaking a lease affect your credit in case you default or simply pay off the car loan before the lease expires?
In some cases, paying off your lease before the lease term expires can harm your credit score. If you plan to build your credit score or establish a credit score for the first time, then paying off the lease early will do more harm than good.
Paying off your car loan early can negatively affect your credit because open positive accounts have a greater impact on your credit score than closed accounts. In addition, there are other factors to consider too.
When you pay off a loan ahead of schedule, your credit score typically drops momentarily, but it eventually returns to normal. The only way your credit score will remain unharmed is if you transfer the lease to another person. Some brokers will help you get your lease covered by someone else for a fee.
Will I Need to Have a Credit Check Before I Lease a Car?
Yes, you need to undergo a credit check before getting approved for a lease. But this is not the time to worry and think, “How does leasing a car affect your credit score?” because it’s not one of those ‘hard’ checks that affect your credit score. You are more likely to undergo a ‘soft’ check just for the creditor to make sure you can afford the monthly payments, which is great.
How to Check Your Eligibility Before Leasing a Car
It’s always important to check your eligibility before deciding on leasing a vehicle to avoid any issues down the road. Before you lease a car, there are a few things to keep in mind, so your credit score won’t be negatively affected.
Here are our three tips for you:
- Always check your credit score before applying for a lease.
Checking your credit score and report is a great place to start. You’ll be able to get an answer to the question, “Does leasing a car affect your credit?” and understand where you stand and what interest rates to expect.
It’s also a good idea to understand your financial situation and what you can afford in terms of monthly payments. Once you have all of this information, you’ll be in a much better position to start shopping for your next car lease!
You can check your credit score online and learn what credit score you can start with if you apply for a lease. Naturally, the higher the credit score, the lower the interest rate. Even if you have a low credit score, you shouldn’t worry much. There are high chances you’ll still get your lease but with a higher monthly interest rate.
- Make monthly payments on time.
The next thing you should pay close attention to is your finances. The only thing that can negatively affect your credit score is missing or being late with your monthly payments.
So, before applying for a car lease, see how much money you can afford to pay to a financing company every month. Also, look up what type of vehicle you can afford while there. Once you’ve put your finances in order and gotten your car lease, make sure that the required amount is paid on time.
Keep in mind that car insurance usually is not included in the price. But even though many are left wondering why car insurance costs so much, they are still getting one nonetheless — about 87% of US drivers have car insurance, according to these auto insurance statistics.
- Consider a guarantor for your lease.
You might be able to add a guarantor on your lease, depending on whether the contractor allows it. An insurance guarantor is a great option to have in case you default on the lease. A guarantor can help you pay the rest of the lease if you can’t do it yourself.
Related: Does Being a Guarantor Affect Your Credit?
Work to Improve Your Credit for the Next Lease
Even if you’re not planning on leasing a car anytime soon, it’s always a good idea to work on improving your credit score. A strong credit score will give you more options when the time comes to lease or finance a new car, and it can also help you save money on interest rates. There are several simple steps to improve your credit score, so start today, and you’ll be in good shape for the next time you need to lease a car!
Buying vs. Leasing a Car
While leasing is great and all, you should keep your options open. Understanding the differences between buying and leasing could potentially help you make the right choice. There are many pros to both options, but it all comes down to your personal decision.
Some are curious, “Does leasing a car build credit, and what happens if one decides to buy a car instead of leasing?”
Sometimes the better option is to buy a less expensive automobile or used car without applying for an auto loan. According to the US auto sales statistics, around 61.4% of car buyers prefer purchasing from a dealership. Yet, there are instances where one opts for leasing the car.
When you buy a car, you own it outright and can sell it or trade it in when you’re ready to purchase a new one. You’re also not restricted to a mileage limit like with a lease. On the downside, buying a car is a more expensive option, and you’ll be responsible for all repairs and maintenance.
For more details on the differences between buying and leasing, check out this article.
Bottom Line
Leasing a car is a great option for many people, but it's important to understand how car leasing impacts the credit score. If you have any questions or concerns, check with a financial professional before making any decisions.
