Car leasing is the best option for individuals who want to drive the latest vehicle without necessarily owning it. The dealership gives you a car to use over a period, and you must make the agreed monthly instalment.
However, you may not be able to lease a car without having good credit. Dealerships require prospective lessees to have a near-perfect credit rating.
But does leasing a car build credit? Does faithfully making monthly payments help you build your credit history? This article explains everything you need to know about the role of car leasing in improving or diminishing your credit score.
How Leasing a Car Impacts Your Credit Score
Leasing a car is an excellent way to build your credit. It works like a car loan and involves regular monthly payments. Every time you make a payment, the car dealership or lender reports to the credit major reference bureaus – Equifax, Experian, and TransUnion.
Thus, anyone looking at your credit report should be able to see how well or poorly you’re doing. Your car lease contract is an instalment account. You can build a good credit history if you maintain consistent payment of your obligations.
However, if you default or miss a payment for more than 30 days, the dealership will make a negative report, adversely affecting your credit history. That’s why staying current on your monthly lease payments is critical to avoid getting reported negatively.
Here’s how car leasing impacts your credit score:
- Credit Mix: Did you know that 10% of your credit score is composed of the credit mix? Having an instalment account such as car leasing helps you have a wide variety of credit – not just revolving credit. Lenders can build confidence in you by assessing how well you handle all your credit obligations.
- Payment History: Your payment history accounts for 35% of your credit score. That means that making consistent and regular monthly payments can build your credit. However, missing a payment may lead to the downgrading of your credit. So, you should prioritize on-time payments to improve your credit history.
- Amounts Owed: The amounts you owe on your credit accounts indicate your status as a low-risk or high-risk borrower. Low-risk borrowers only utilize a portion of the available credit, while high-risk borrowers go overboard. Since this factor accounts for 30% of your credit score, you should use only a tiny portion of your credit.
- New Credit: Opening too many credit accounts within a short period gives you away as a high-risk borrower. That’s especially true if you have only started borrowing recently. If you have a long borrowing history, that may not represent risk. This aspect accounts for 10% of your credit score.
- Length of Credit History: A more extended credit history will likely help improve your credit score. You may get all or part of the 15% of the portion of the score represented by this aspect. Recent entrants into the credit market may have to wait longer before attaining desirable credit scores.
- Credit Inquiries: Even though this aspect does not contribute a specific percentage to the FICO score, it can impact your credit overall. Making too many credit inquiries may raise a red flag, indicating that you could be in trouble. However, that doesn’t include the queries you initiate to check your credit.
How to Lease a Car With Bad Credit
Leasing companies can’t ignore you if your credit is good or better. However, having bad credit may make it impossible to get approved for a car lease. In that case, you cannot build your credit using a car lease.
Here are your options if you cannot get a car lease due to bad credit:
1. Put Down Some Money
Did you know you can compensate for bad credit by putting down a substantial sum? With a large down payment, you prove to the leasing company that you can be trusted to meet the terms of the lease agreement. Besides, a large down payment reduces the lender’s risk, making it easier for them to accept.
2. Get a Co-Signer
Your bad credit cannot grant you a car lease. Why don’t you get a co-signer if you cannot raise enough money for the down payment? If you default, it could be a friend or family member who agrees to pay for you. However, to build your credit and maintain healthy relationships, make all your monthly payments faithfully.
3. Improve the Debt-to-Income Ratio
How much of your income goes into debt repayment? Debt-to-income ratio is the portion of your income you use to pay your debt every month. You must work on repaying most of your debts to focus solely on lease payments. With that, you’ll improve your cash flow, increase your credit rating, and easily qualify for a lease.
Alternatives to Car Leasing
With bad credit, it’s impossible to qualify for a car lease. However, that doesn’t mean completely missing out on a vehicle, especially if you need one. The following are some of the options available to you if you cannot get a car lease:
1. Swap a Lease
You don’t have to be the one initiating and signing a lease agreement. If your friend or family member wishes to get out of a car lease soon, why don’t you take it over? Since you have bad credit, you may keep the current lessee as a co-signer on your lease agreement. With that, you’ll drive the car and make monthly payments yourself.
2. Consider Car Sharing
If you can’t lease a car due to bad credit, why don’t you consider renting one for a short time? Car sharing involves renting a vehicle for a few hours and paying for it until you return it. It is a good option for having a car in the short term as you work to improve your credit score.
3. Special Car Financing
While getting a lease with bad credit is near-impossible, acquiring car financing isn’t as tricky. Most lenders can give loans to individuals with poor credit, albeit at higher interest rates. The good thing with financing is that you’ll eventually own the vehicle rather than return it to the dealership.
4. Vehicle Subscription Services
Vehicle subscription services are similar to car sharing since you pay to use a vehicle for a short time. With subscription services, there is a definite vehicle rental period. The dealership may require payment of an upfront fee to get the vehicle. Then, you’ll pay for it monthly until you return the car. Even though it involves a credit check, it’s easier to get than leasing.
Factors to Consider When Leasing a Vehicle
Should you lease or finance a car? Leasing and financing have the same effect on your credit. But whether you should pick one or the other depends on several factors. Pay attention to these factors to ensure that you do not miss out on the possible benefits of financing vs leasing.
1. Possibility of Car Ownership
Did you know that a traditional auto loan guarantees you’ll own the vehicle in the end? That cannot be said of a lease agreement, which demands that you return the car when the lease ends. However, if you opt to purchase it, you may pay more than if you had purchased it outright.
Therefore, consider whether or not you would like to keep the vehicle at the end of the period. If yes, financing the vehicle purchase is the way to go. But if all you want is to drive a newer vehicle often, leasing is the best option. You’ll pay for the car for the duration of the lease and operate it within the given conditions.
2. Costs of Leasing
Leasing a car has more affordable monthly payments than financing. You make lower monthly payments for driving a brand-new vehicle. Leasing may also free up your finances, enabling you you pay other debts or meet additional obligations.
However, leasing may come with additional costs at the end of the lease. Depending on your lease terms and how you used the vehicle, you might be paying mileage fees and excessive wear and tear fees to repair scratches, dings, dents, and windshield cracks. Plus, once the warranty period lapses, you’ll be liable for maintenance costs.
3. Restrictive Use
With a leased vehicle, you’re not free to use it as you wish. For instance, you cannot make any alterations or improvements to the car. Dealerships do not allow small changes such as tinting windows. The dealer would also be concerned with the wear and tear on the vehicle when you return it. That’s because the vehicle’s condition determines its resale value. You must also drive the car within the agreed mileage limits or risk paying an excess fee.
The situation is different with financing a vehicle that lets you use the car as you wish. After all, you’re expected to own the vehicle when the loan period lapses. Therefore, you do not have to worry about paying for excessive damage to the car.
How to Get Ready for Your Next Car Lease
Possibly, you can’t get a car lease today, or you must make a large down payment to get one. You have bad credit and cannot acquire a car lease. Before you start building your credit with a car lease, you should first make sure you can qualify for one. The following are fool-proof measures to get your credit back on track in no time:
1. Keep Your Credit Utilisation Low
Besides leasing a car, one of the ways to build your credit is to keep your credit utilisation low enough. Use less than 30% of the available credit on all your credit accounts. That’s especially critical with credit card debt, which can mess up your credit rating if overutilised. Credit utilization accounts for 30% of your credit score and should be used sparingly. Find a way to pay off your credit card balance before the monthly due date.
2. Timely Payment of Your Bills
Timely payment of your bills and other commitments accounts for 35% of your credit score. Therefore, neglecting timely payment can result in a reduction in your credit rating. Avoid missing a charge for more than 30 days. If you do, call the creditor immediately and ask them not to report to the credit reference bureaus.
3. Raise Issues with Credit Card Errors
Credit reports contain information on your credit accounts and how well or poorly you make payments. However, these reports may not always be factual. Some may report missed payments where there are none. So, diligently check your credit reports for the following information and report noticeable errors:
- Name of the lending company
- Monthly payments
- Total amount payable
- Months remaining on the loan
- Any instances of late payment
4. Stay in the Same House for Longer
Did you know that moving houses often can result in downgrading your credit? Therefore, you should consider maintaining the same address for longer. With that, lenders will view you as someone who can seriously manage finances and take responsibility for their debts.
The opposite is true if you keep moving houses. You’ll come out as someone who isn’t entirely serious about your obligations. In the minds of lenders and credit bureaus, you have rent issues that make you move houses more often than you would like.
5. Keep Your Credit Accounts Open
You might be convinced that closing your credit accounts is the best way to improve your credit limit, but it is far from it. Closing an existing account can adversely affect your credit. Instead of closing an account, downgrade it or transfer the credit limit on it to a new account. With that, you’ll maintain or even improve your credit score.
6. Avoid Opening Many Credit Accounts
Opening new credit accounts close together can hurt your credit. So, you should avoid opening many accounts close together, especially if you’re using credit for the first time. Space your credit application in a six-month interval and research to know the best credit cards for you. However, if you have been a borrower for longer, the dent in your credit rating won’t be significant.
7. Enroll as a Voter
Getting on the electoral roll is a simple procedure that anyone can undertake. Part of the information you’ll provide is your address. Lenders use the address to assess your loan applications. Thus, it can be your family home, even if it’s shared.
8. Ask for a Credit Limit Increase
Has it been a while before your credit limit was increased? Did you know you can boost your credit score by asking for a limit increase? Approach your credit card issuers and ask for a credit limit increase. Even without utilizing the extra credit, it’s critical in helping increase your credit rating.
The Bottom Line
Does leasing a car build credit? Yes, it does. Leasing is a form of credit that lets you drive a vehicle to make regular monthly payments. Therefore, getting a car lease helps you to diversify your credit mix. Making your monthly payments on time improves your chances of getting additional credit.
However, not everyone can get a car lease. Some have bad credit, while others have no credit at all. For these individuals, getting a lease swap, financing a car purchase, making a sizeable down payment, etc., are possible ways of getting a new car. As they explore these options, they should work on building their credit.
Frequently Asked Questions (FAQ)
Yes, leasing a car builds credit by helping you diversify your credit mix. A large variety of credit accounts help to develop your credit significantly. Plus, faithfully making your monthly payments on a car lease can make you look responsible. However, you could hurt your credit if you delay or default on your monthly expenses.
The credit score needed for car leasing is at least 620. From 620 to 679, you may qualify for a car lease but with a down payment or higher monthly payment. A credit score above 680 can give you automatic qualification for a car lease. Plus, your monthly payments will be much smaller than if you have poor credit. Therefore, maintaining excellent credit is the right way to ensure qualification for a car lease.
Yes, you can lease a car with poor credit. However, you must raise substantial money for the down payment and make higher monthly payments. The kind of credit that helps you access a car lease is moderate. If it’s too poor, you’ll have limited chances of getting your application for a car lease granted.
While leasing a car can build credit, it isn’t the only way to do it. Making timely payments on your credit accounts, diversifying your credit mix, and avoiding opening too many credit accounts can help you improve your credit. Report any noticeable errors in your credit reports to avoid getting flagged as a defaulter. Finally, maintain your residence for longer to appear responsible for your affairs.
By making smaller monthly payments, you should lease a car instead of buying one, especially if you want to drive a new one. Besides, leasing enables you to get newer vehicles often. Instead of getting tied down to one car for decades, you can get a new one every three years. Plus, leasing may also result in the eventual purchase of the vehicle if the agreement allows it.