Leasing a car can build credit, like a car loan does, as long as you make your on-time payments. 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.
Although car loans and car leases differ in many ways, in terms of building your credit, leases can offer many of the same benefits. This article provides all you need to know about car leases and if they can work as a feasible credit builder option for you.
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Yes, leasing a car can build credit. Just like a car loan, you make monthly payments on the debt you owe with a lease, and your credit report lists the lease as an installment loan. As long as the leasing company reports to all three major credit bureaus — Experian, Equifax, and TransUnion — and you make your payment on time, your lease can build your credit.
Since your payment history accounts for 35% of your FICO® score, leasing a car can significantly impact your credit history, either negatively or positively. While making on-time payments may help build your score, a late payment can hurt it.
Leasing a car might impact your credit in several ways, including:
- Credit mix: Your credit mix accounts for 10% of your FICO® score and refers to the different types of credit accounts you have, such as revolving credit and installment loans. How well you handle different types of credit may indicate to lenders your ability to handle new credit with them. Getting a lease — considered an installment loan — may add a new type of credit to your mix, so you may see score improvement. However, your payments have more of an impact as described in the next bullet.
- Payment history: Your payment history makes up 35% of your FICO® score, so your payment history impacts your score the most. So missing payments on your lease can cause your credit score to suffer, just as it would for missed payments on any other type of revolving credit or loan. If you get a lease and want to improve your score, make on-time payments a priority.
- Amounts owed: Taking on a lease may increase your overall amount of debt, but having debt doesn’t necessarily make you a high-risk borrower. FICO® research shows that your level of debt may predict your ability to meet your payment obligations on time. So increasing debt may also increase the likelihood that you have trouble making monthly payments on time. However, amounts owed refers to an overall picture of debt you owe. According to FICO®, your credit utilization — how much available revolving credit you have in use compared to your credit limit — impacts your score more than the total debt you owe.
How is a car lease reported to the credit bureaus?
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 details:
- 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
The minimum credit score to qualify for a lease depends on the lender. According to Experian, in the first quarter of 2022, the average credit score for a car lease was 734*. Typically, the better your score, the better lease terms a lender will offer you, such as a better interest rate and lower down payment.
*Data was collected as of July 2022 and may be subject to change.
Lenders use standard borrower risk profiles, determined by credit score ranges, to indicate their confidence in extending a lease to you. Higher scores have a higher likelihood of lease approval with favorable terms. The five levels include:
- Super prime: Credit scores of 720 or above
- Prime: Credit scores between 660 and 719
- Near prime: Credit scores between 620 and 659
- Subprime: Credit scores between 580 and 619
- Deep subprime: Credit scores below 580
You may hear credit tiers discussed at the dealership as they consider your lease terms. While the tiers may follow the structure of borrower risk profiles used by lenders, the range of credit scores for these tiers can vary from state to state and dealership to dealership.
Instead of credit tiers, some dealerships use the popular FICO® Auto Score, which has multiple versions. While this score represents a standard, you may not know which version a dealership uses.
Regardless of whether a dealership uses borrower risk profiles, credit tiers, or other scores, your score impacts whether you can be approved for a lease as well as what interest rate you will pay.
When it comes to getting a lease, car manufacturers set up lease programs and terms within their own financing companies. Their unique lease programs may use borrower risk profiles to consider your lease terms, or they may create their own risk levels of creditworthiness, placing ranges of credit scores into numbered or lettered tiers. Some auto finance companies use the popular FICO® Auto Score, which you may find listed on your credit report.
Regardless of how an auto financing company determines its risk levels, these determinations are based on credit scores. Your score impacts whether you get approved as well as what interest rate you end up paying.
You may qualify for a lease with bad credit, but it may be more difficult to do so. Plus, you may encounter additional, less-favorable lease terms so that the lender reduces its risk, such as:
- A bigger security deposit
- A larger down payment
- A higher interest rate — known as the "money factor"
- Limiting the type of car they’re willing to lease to you
If you have poor credit and have trouble securing a lease with reasonable payments, consider using these options:
- Lease transfer: With a lease transfer, you can have a friend or family member transfer their lease to you. Because you may still need to qualify in terms of credit, your friend or family member may be required to stay on the lease as a cosigner.
- Special financing: Many dealerships also have special financing options for people to qualify for loans, even with poor credit. While you won’t be leasing a new car, the special finance department may help you find a car and loan terms that work with your financial situation.
- Car-share services: You can rent a car for a short period of time, instead of owning one outright. Especially popular in larger cities, you can often rent for just a few hours, if necessary.
Car dealerships typically arrange lease financing through the manufacturer’s financing company. Since car dealerships don't provide leases directly, any reputable bank, credit union, or lender offering car loans could potentially provide you with a lease.
To find which institution can offer you the best deal, shop around. Call a few dealerships in your area to see if they're offering any special deals on the car you’re interested in leasing. Also contact other reputable lenders to inquire whether they provide leases and how much it would cost for you to lease the vehicle you want.
These places may need to run a credit check to give you accurate information. Shopping for the best auto rates counts as one inquiry if you shop within a specific period of time — ranging from 14 to 45 days, depending on the scoring model. So, the long-term financial benefits you get from shopping for a good rate typically outweighs any short-term impact to your credit.
Leasing a car has its fair share of advantages and disadvantages. To get a better idea of how leasing a car impacts your financial future, weigh the pros and cons below.
- No or low down payment: You don’t usually need a down payment when you lease a car, but depending on your credit score, you may need one.
- Bumper-to-bumper warranty: Newer cars usually need fewer repairs. If the vehicle does need repairs, it may fall under the manufacturer's bumper-to-bumper warranty. If you’re comparing leasing to buying a used car, you may not get as great a warranty without paying extra for it.
- Lower monthly payments: A monthly lease payment typically costs less than the loan payments would be to purchase the same vehicle. If times get tight, a lower monthly payment may make hanging on until the end of your lease easier than worrying about getting out of a car loan.
- No upfront sales tax: When you buy a car, you have to pay sales tax on the vehicle's total value all at once. Leasing spreads those costs out over the lease term, which helps reduce your upfront costs.
- No worries about trade-in value: When you lease, you don't have to think 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.
- Excess mileage penalties: A lease contract specifies a limited number of miles for each lease year. If you put more miles on the car than the lease allows, you have to pay an excess mileage penalty when you turn the vehicle in. Excess mileage penalties can range from 15 to 20 cents per mile, which can add up quickly if you go over the limit.
- 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. A lease pays for just the depreciation of a vehicle over the lease term (plus interest and taxes). Because a vehicle loses more market value at the beginning of the lease term than at the end, you may still owe a substantial amount even as you near the end of your lease. According to the Federal Reserve, your payoff plus additional charges could possibly cost you thousands of dollars.
- Higher insurance premiums: Although you don't own a leased car, you still need an insurance policy to cover it. Leased cars tend to require more coverage than a car you own outright because lenders — that technically own the leased vehicle — are protecting their investment.
- Excessive wear and tear penalties: At the end of your lease term, the leasing company expects you to return 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 may pay excess wear and tear penalties when you turn it in.
To understand if a lease works best for you, consider these three main factors:
- How much do you drive each year? If you primarily need a car to commute to work and run errands around town, then the lower mileage limit on a lease may not be a concern. However, if you drive a lot for work or love to take long road trips, see how much your payment increases if you increase the mileage limit or 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 leased vehicle to another ensures you always have a car payment. If you want to own the same car for several years, buying makes a great option for you, but if you want to drive a new car every few years, leasing allows you to do that. Of course, if you want the best of both worlds or fall in love with the car you’re leasing, buying out a car lease may work best for you.
- Do you have good credit? Poor credit can make it more difficult to qualify for a lease and could result in you needing to pay more money upfront or higher interest rates. The finance department at a dealership can walk you through the best deals and help you understand if you qualify for a lease or not.
Leasing vs. buying
When you consider leasing vs. buying, you have to assess your needs and consider not just monthly costs but long-term costs as well.
Maybe you need to buy a car with bad credit, but you need a lower monthly payment than with a lease. To achieve this, you typically have to buy an older-model used car , and you still may not be able to afford the overall cost of owning the car. When you lease a car, you can often get a nicer vehicle with a good warranty that, over the years of your lease, ends up costing less than buying a used car and making repairs.
Mileage limits on a lease may not work for you if you have a lengthy commute or need to drive a lot for you and your family’s needs. The additional fees for mileage plus penalties for wear and tear can add up in terms of cost and anxiety. Buying a car, on the other hand, can release you from those worries.
Keep your credit score in good shape for a lease
A good credit score can give you the best rates and terms whether you want to lease or buy a car. From lower monthly payments to a good warranty during the lease period, a lease may also help you build your credit.
If you are facing challenges with your finances, take control of improving your credit by checking out Self’s Credit Builder Account, a simple, no-hassle way to build credit. Improving your score now helps you better position yourself for desirable lease terms in the future.
- FICO® is a registered trademark of Fair Isaac Corporation in the United States and other countries.
- The Credit Builder Account identified in this article is an advertisement for Self products.
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About the author
Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.
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