At a Glance
When looking at acquiring a vehicle for personal use, the average person has two options to consider: buying and leasing. People often only consider the purely financial factors when it comes to this decision, rather than digging a little deeper into seeing how each affects credit. Learn everything there is to know about how leasing a vehicle can impact your credit score for better or worse.
In this article, you’ll learn:
Leasing vs. buying a car
For those who have never leased a car before, the concept can be a little bit confusing. When you buy or finance a vehicle, that vehicle is yours so long as you make your monthly payments on time and in full. When your loan is paid off, you are the legal owner of that vehicle and can do with it whatever you please.
On the other hand, leasing a vehicle works similarly, but not quite the same way. When you lease a vehicle you still pay an upfront fee that covers the cost and taxes of a new vehicle. In addition to this, you also make monthly payments to the lessor (who acts in much the same way as a financer). The major difference between buying and leasing, however, is that when you lease a vehicle you only sign a contract to drive it for a set number of years or until a set number of miles. At that point, the vehicle is returned to the lessor and your financial obligation ceases.
How leasing a car can help build credit
As with financing a vehicle, lease payments are reported to the credit bureaus for anyone who is wondering if leasing a car builds credit or if leasing a car helps build credit. When you make on time payments to your lessor, those payments are reported to the bureaus and carry the same weight as any other type of debt payment. This means that these payments, assuming they are made in full, will bolster your credit score over time by showing you are a responsible debt holder.
Can leasing a car hurt your credit?
For those wondering whether leasing a car helps your credit or hurts your credit, the answer is yes to both depending on the circumstance. As mentioned, on time and in full payments will reflect positively on you. However, if you consistently miss lease payments or underpay then it will be reported to the credit bureaus and it will be viewed as you not fulfilling your debt obligation. This can quickly damage your credit score.
Things to consider before leasing a car to build credit
There are a variety of reasons that people may choose to lease a car instead of outright buying one or financing one. However, for those who are considering leasing for the sole reason that they don’t have to own the vehicle and the fact that it can help your credit, keep the following in mind:
1. Your payments might not get reported
Since lease payments aren’t technically debt, your lessor isn’t obligated by law to report your payments to the credit bureaus despite most doing so. If your credit score is a major consideration for why you’re leasing, inquire as to whether they report payments.
2. Your score may drop at first
Whether you are financing a car or leasing a car, it’s likely that a lessor will do a hard pull on your credit score. This will cause your credit score to drop by a couple points in the immediate future, but it should go back to where it was within a couple of months.
3. Getting the best deal can harm your score
When trying to lease a car with bad credit, you may be going around to a number of different lessors in an attempt to get the best rate. Keep in mind that multiple inquiries on your credit account will cause your score to drop.
4. Getting a mortgage will be difficult
For those who are interested in purchasing a home, keep in mind that your debt to income ratio is a factor lenders consider. If your lease payments are being reported to the bureaus, they will factor into your total monthly debt. Assuming you already have a fair amount of debt outstanding, a lender may not want to approve you for a mortgage.
5. You will pay more than you think
In almost every situation, leasing a vehicle will be more expensive than buying it. This is due to the fact that once you return the vehicle, you need to pay for any repair costs to damage that may have occurred while you drove it. Additionally, while you have it, you will need to pay maintenance costs to keep it functioning on the road.
6. You might not be approved for a lease
Just because you aren’t taking on a loan doesn’t mean it’s easy to secure a lease. In some situations, in fact, it can be just as difficult. The credit score to lease a car on average is higher than a generally low credit score, meaning you need a positive payment history for the best shot at approval.
7. You can’t pay off the lease early
Unlike with a loan, there isn’t a prepayment option for a lease in most cases. Once you sign the contract, you will be driving that vehicle for the number of years you agreed to.
How is a car lease reported to credit bureaus?
For those curious as to whether a car lease builds credit and how does a car lease affect your credit, payments to the lessor are reported to the bureaus directly by the lessor themselves. They simply provide a record of your payments and if they were on time and in full. This is viewed by the credit bureaus as a form of debt and factors into your overall credit score.
What credit score do you need to lease a car?
Generally, for the best chance of approval, a person should have a credit score of at least 680 when they apply for a lease. On top of this, you will need to have strong enough financials to convince the lessor that you are able to make payments.
Learn more: Credit Score to Lease a Car
Can you lease a car with bad credit?
Securing a car lease with bad credit is extremely difficult. Unlike when financing a vehicle, there are very few bad credit lease options. This means you should have a credit score of at least 680 when considering applying.
When looking at whether leasing a car helps build credit, you may wonder if it’s beneficial to pay off your lease early. In the majority of situations, however, it is not possible to pay off a car lease early, which means it will not affect your credit score.
Generally speaking, when looking at paying a car lease build credit, both buying and leasing can benefit your score. However, for the all-around cost and benefits, buying a car is the better option if you can afford it, especially since there’s no guarantee your lessor will report payments.
As you look at whether leasing a car improves credit and read about how it does, you may be distraught to see your score drop slightly after applying. However, this is normal as there is a hard inquiry into your credit score which the credit bureaus ding your score for slightly.
When considering whether leasing a car affects your credit or does leasing a car build your credit, the biggest downside is that the payments may not be reported and you can’t pay the lease off early.