Does Leasing a Car Build Credit?

Does Leasing Car Build Credit?

Written by Janet Berry-Johnson, CPA
Reviewed by Lauren Bringle, AFC®

When you're in the market for a new car, the decision to buy versus lease often comes down to how much you can afford to pay each month and how long you plan on holding on to the vehicle.

Car loans and car leases are different in many ways, so you may be surprised to discover that a lease is essentially the same as a car loan, from a credit standpoint. So, does leasing a car build credit? In short, yes — as long as you make your payments on time.

Let's take a look at what you need to know about car leases and if they are a feasible credit builder option.

How does leasing a car affect your credit score?

Both car loans and car leases are debts. Here's how Experian[1] explains it:

"When you lease a car, you'll have fixed monthly payments for the duration of a lease agreement. As with an auto loan, the creditor will report your monthly payments to the credit reporting agencies, and the account will show up on your credit report as an installment loan."

Since your payment history accounts for 35% of your FICO Score,[2] leasing a car can significantly impact your credit score. As long as you make your monthly payments on time, the lender reports positive payment history to the credit rating agencies (also known as a credit bureau), which helps you build credit.

However, if you have late payments in your credit history or default on your loan, your credit score will be damaged, just as it would be for missed payments on any other type of loan.

If I have bad credit, should I lease a car?

There's no minimum credit score to qualify for a lease – it varies from dealership to dealership. But according to Experian, the average credit score for a car lease is 729,[3] which is in the “prime” category.

Leases tend to have stricter credit requirements than car loans because when you lease a car, the auto leasing company essentially lets you use the vehicle unsupervised, for several years with little or no down payment. That can be a risky proposition for the leasing company. So if you have a low credit score, the dealer might:

  • Require a bigger security deposit
  • Require a larger down payment
  • Charge a higher interest rate — known as the "lease factor"

All of this can make leasing more expensive. For that reason, if you don't need a car right now, you may be better off taking steps to improve your credit score before leasing a car. You might consider an alternative, such as a credit builder loan, to help you get a step closer to affording a car loan.

Can I lease a car with a 500, 550, or 600 credit score (for example)?

A credit score lower than 600 puts your score in the "subprime" or even "deep subprime" category, which will make it more difficult — although not impossible — to lease a car.

Besides impacting your down payment, security deposit, and interest rate, a dealership may use your credit score to determine the type of car they're willing to lease to you. With a bad credit score or low credit score, the car you want to lease may not be an option.

Does leasing a car build your credit score?

Auto leasing companies typically report vehicle lease payments to one or more of the credit rating agencies, similar to the way lenders report installment loans. So make all of your lease payments on time, and the leasing company will report positive payment history. Since payment history is one of the most important factors in calculating your credit score, those on-time payments will help improve your credit score.

On the other hand, if you miss one or more payments, those missed payments will appear on your credit report and lower your credit score. For that reason, it's a good idea to make sure you can afford the monthly payments before signing a lease agreement.

How does a car lease show up on your credit report?

Leasing companies report to the credit bureaus the same way auto loan lenders do. A car lease shows up on your credit report in the installment account section, and your credit report will show:

  • The name of the leasing company
  • Your monthly payment
  • The total you'll pay for the vehicle during the lease period
  • The number of months remaining on your lease
  • Whether you have a cosigner
  • The number of times you've paid late

What are the pros of leasing a car?

So, is it better to lease or buy a car? Well, leasing can be convenient. Just consider these advantages to leasing:

  • No or low down payment. A down payment usually isn't needed when you lease a car unless you have bad credit.
  • Bumper-to-bumper warranty. Newer cars usually need fewer repairs. But if the vehicle does need repairs, it will most likely be covered by the manufacturer's bumper-to-bumper warranty.
  • Lower monthly payments. A monthly lease payment is typically less than the loan payments would be to purchase the same vehicle.
  • No upfront sales tax. When you buy a car, you have to pay sales tax on the vehicle's full value all at once. Leasing spreads those costs out over the lease term, which helps reduce your upfront costs.
  • No depreciation. A new car loses roughly 20% of its value in its first year on the road.[4]When you lease, you don't have to worry about trade-in value or selling the car when you're ready to drive something new. You just turn it back in at the dealership at the end of the lease term.

What are the cons of leasing a car?

Leasing comes with some potential perks, but it's not for everyone. Here are a few downsides to leasing a car.

  • Excess mileage penalties. A lease contract specifies a limited number of miles – usually around 12,000 miles for each year of the lease. If you put more miles on the car than the lease allows, you'll have to pay an excess mileage penalty when you turn the vehicle in. Excess mileage penalties usually range from 15 to 20 cents per mile, so they can add up quickly if you go over the limit.[5]
  • Early lease termination fees. If you decide you don't like the car or want to get out of your lease early for any reason, it can get pricey. You may have to pay thousands of dollars in early termination fees.
  • Higher insurance premiums. Although you don't own a leased car, you are responsible for paying for an insurance policy to cover it, and leased cars tend to result in higher insurance premiums than vehicles you purchase.[6]
  • Excessive wear and tear penalties. At the end of your lease term, the leasing company expects you to turn the vehicle in the same condition as it was when you drove it home, minus some normal wear and tear. If you don't keep the vehicle in good condition, you'll have to pay excessive wear and tear penalties when you turn it in.

What factors should I consider when leasing a car?

If you're still wondering whether you should lease or buy a car, here are a few factors to consider.

  • How much do you drive each year? If you primarily need a car to commute to work and run errands around town, then a lease's limited mileage may not be a concern. However, if you drive a lot for work or love to take long road trips, consider buying a car instead.
  • How often do you want to trade up to a newer vehicle? When you buy a car, you can drive it for years with no monthly payments after paying off your loan. On the other hand, going from one lease to another every few years ensures you always have a car payment. So if you don't mind driving the same car for five, seven, ten years or more, buying is the way to go. But if you want to drive a new car every few years, leasing is an easy way to do that. Buying out a car lease is an option as well.
  • Do you have good credit? If you have bad credit, it may be tough to lease a car. Your poor credit could result in needing to pay more money upfront for a car lease and higher monthly payments, both of which negate some of the advantages of leasing.

Can I get a car lease through a credit union or only the dealer?

You might think of visiting a car dealership when you're ready to lease a car, but dealerships aren't the only place to get a car lease.

In fact, dealerships don't provide leases directly; they arrange financing through a financing company. So any bank, credit union, or lender that offers car loans could potentially offer leasing as an option.

Still, according to Consumer Reports[7],

"When you lease a car, you'll have fixed monthly payments for the duration of a lease agreement. As with an auto loan, the creditor will report your monthly payments to the credit reporting agencies, and the account will show up on your credit report as an installment loan."

To ensure you're getting the best deal, call a few dealerships in your area and ask to speak to someone in the finance department. Let them know you're interested in leasing a certain model and ask if they're offering any special deals on that model. They may ask for your credit score to ensure they're giving you the correct number.

Call your local credit union if the manufacturer isn't offering special leasing rates on the model you want. Ask whether they offer leases and how much it would cost to lease the vehicle you want.

How to prepare your credit score for leasing a car

If you're worried about getting approved for a lease or just want to ensure you qualify for the best deals, take steps to improve your credit score before applying for a lease.

The first step is checking your credit report. You can get a free copy of your credit report every 12 months from each of the three credit bureaus at annualcreditreport.com. Review it, looking for ways to improve your credit score, like disputing inaccurate information, getting caught up on past-due payments, or paying down your credit card balances.

While leasing a car can help you build credit, taking steps to improve your credit first can put you in a better position to qualify for a lease and get the best deals available.

Article Sources:

  1. Experian. “Does Leasing a Car Build Credit?” https://www.experian.com/blogs/ask-experian/does-leasing-car-build-credit/. Accessed August 5, 2021
  2. FICO. “What’s In My FICO Scores?” https://www.myfico.com/credit-education/whats-in-your-credit-score. Accessed August 5, 2021
  3. Experian. “What Credit Score Do I Need for a Car Lease?” https://www.experian.com/blogs/ask-experian/what-credit-score-do-i-need-for-a-car-lease/. Accessed August 5, 2021
  4. Edmunds. “Depreciation Infographic: How Fast Does My New Car Lose Value?” https://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html. Accessed August 5, 2021
  5. USA Today, “End Your Car Lease Without Getting Dinged,” https://www.usatoday.com/story/money/cars/2017/08/07/end-your-car-lease-without-getting-dinged/537553001. Accessed August 6, 2021
  6. Car and Driver. “Is Insurance More Expensive for Leased Cars: Everything You Need to Know,” https://www.caranddriver.com/car-insurance/a31268675/is-insurance-more-expensive-for-leased-cars/. Accessed August 5, 2021
  7. Consumer Reports, “How to Get the Best Car Lease,” https://www.consumerreports.org/car-financing/how-to-get-the-best-car-lease/. Accessed August 6, 2021

About the author

Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes. See Janet on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

Editorial Policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).

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Written on September 9, 2021
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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