Leasing a car does affect your credit score, much like buying a car with a loan. However, the exact impact depends on a variety of factors. These are some important things you might want to consider before signing a lease.
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In light of the unprecedented financial crisis caused by the COVID-19 pandemic, the credit bureaus have expanded free credit report access. You can now download your credit report from each bureau once per week through annualcreditreport.com.
We recommend taking advantage of these free weekly reports to check your credit often during this crisis, so you can avoid mistakes.
Does Leasing a Car Build Credit?
Leasing a car will usually help you build or rebuild credit because the payments are reported just like auto loan payments. When leasing a car, you pay fixed monthly payments over a set number of months, usually between 24 and 48. Car dealers, lenders, and auto manufacturers aren’t required to report payments to the three major credit bureaus, but most report payments every month to Equifax, Experian, and Transunion.
As long as your lease payments are reported on your credit report, you’ll be able to build or rebuild your credit with regular, on-time payments.
Can Leasing a Car Hurt Your Credit?
Just as leasing a car can help you build credit, if you miss payments or default on your lease, it can cause your credit score to drop. By making regular payments on time throughout your car lease, you can keep from hurting your credit.
You may sometimes see a small drop in your credit score when you first start your car lease because a new account opens. However, over time that impact will reduce. Additionally, if you have several inquiries on your credit when trying to get approved for a lease happen over more than a month, you may experience a minor short-term hit to your credit score.
However, with most credit scoring models like the FICO® Score (the most commonly used credit score), it’s understood that you’re likely to get several quotes to research your best interest rates and lease or loan options.
Does Paying Off a Lease Early Affect Your Credit Score?
Paying off a lease early usually affects your credit score since the account will be reported as closed. The only way it will not be reported this way is if someone else takes over the lease on your behalf.
Paying Off a Car Lease Early Can Hurt Your Credit
Another way your credit and finances could be negatively impacted is if you end your car lease early. This is because there are often stiff penalty fees to pay off a lease early. Additionally, it is usually reported as a closed account. On your credit report, this looks similar to when a creditor allows you to pay less on a debt to close it.
Some car lease agreements do allow you to have someone else take over the lease. This depends on your contract verbiage. There are also websites or brokers who will help you get a lease covered by someone else for a fee.
How to Prepare Your Credit for Leasing a Car
Before leasing a car, you should check your credit score so that you have an idea of where you stand in the eyes of a creditor as well as research the costs you’ll have to pay. In most cases, just like with an auto loan, you’ll qualify for lower interest rates if you have a higher credit score. Learn more about credit here.
Most auto leases involve a down payment or security deposit. You’ll also want to pay attention to the other various terms before signing. Understand any implications of paying off your car lease early, since as mentioned previously this usually impacts your credit negatively. Oftentimes you have to pay additional fees if there is any damage or excessive wear on the car. You will also be charged if you go over the allotted mileage on the lease.
Sometimes you may be able to lower the interest rate you pay by paying a higher security deposit.
What to Pay Attention to in Your Car Lease Financing Agreement
These are the components of a car lease agreement that can impact your finances:
- Amount due at signing: this is what you pay when you sign and take responsibility for the car. If you trade in another vehicle, you will have a credit and pay less initially. This will include any deposit and initiation fees as well.
- Monthly payments: This is the amount you’ll be responsible for each month. You’ll want to make sure you run the numbers and have a good idea of what your fits your budget. This will take into account any sales tax and may include estimated depreciation.
- Purchase option: This outlines the amount you may be able to purchase the car for at the end of your lease and any purchase fees you’ll pay. The final purchase price will likely depend on the inspection and mileage when your lease ends.
- Early termination fee – this lays out any fees associated with ending the lease early.
Buying Vs. Leasing a Car
Leasing a car may be the best option for you, but you may also want to consider if it’s a better financial decision to buy a less expensive car that you can purchase without a loan or even see what rates you qualify for on an auto loan.
Leasing may allow you to have lower monthly payments, but you’re not gaining any value (like you are with a car you could sell after you buy it outright or pay off a loan).
Leasing a car does affect your credit score and usually it can help you build credit. However, if you miss payments, it can be detrimental to your credit. Understanding the implications of leasing and preparing your credit will help you get the best rates and manage your finances.
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Article last modified on October 28, 2020. Published by Debt.com, LLC