Leasing a car rather than buying can mean lower payments, but will your credit score stand in the way?
Customers starting a new lease during the second quarter of 2020 had an average credit score of 729, according to credit bureau Experian.
Lease requirements vary
As with car loans, the best leasing deals go to the people who present the lowest risk.
Whether it's a lease or a loan, your credit score figures prominently into whether you get financing. But a finance office will also consider your income, existing payment obligations and track record for handling debt. Lease requirements vary by automaker, and they change depending on market conditions.
A score of 680 provides a good dividing line for understanding what to expect, says Scot Hall, executive vice president of operations for Swapalease, an auto lease marketplace. Other experts agree.
Many lenders use auto-specific credit scores that weigh past car-loan payments more heavily.
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If your credit score is 680 or above
You’re going to find it easy to lease at multiple places, and you’re likely to get the attractive deal seen in the ads. When you’re approved to lease, you will likely have room to customize the deal a bit — for instance, asking for $0 down in exchange for higher monthly payments.
The basic deal offered for a particular make and model is generally uniform across regions, and the lender is typically an arm of the car manufacturer (Toyota Financial Services, for example).
You might find some special deals on particular models as you shop for a car lease. If you’re choosing among similar lease deals, pick a dealer with a reputation for good service, advises Matt Jones of automotive shopping site Edmunds.com.
If your credit score is lower than 680
Leasing gets a bit more challenging at lower score levels.
You’re likely to have to pay more at signing, and you may have to pay more each month, too; Jones says it could be as little as $10 or as much as $125. Still, he says, lease payments are often lower than loan payments to buy the same car.
You also may not be able to lease precisely the model you wanted under the terms you qualify for. Have a few backup choices you’d be happy with, in case your first pick is out of reach.
Another option worth exploring may be leasing a used car, though selection will be limited.
You may find it easier to buy a used car. The credit score needed to buy a car has a bit more wiggle room. According to Experian, the average score for someone financing a used car at the the end of June 2020 was 657.
Does leasing a car build credit?
Leasing is another way of financing a car, basically buying the part of the car's lifetime that you will be using. Leasing a car can build credit in the same ways that buying a car does:
Payment history: Paying on time is the most important thing affecting your credit, and missing a payment can send your score plummeting. So, getting the payments in on time is essential for a good score.
Credit mix: If you have both loans and credit cards, that’s better for your score than having just one kind of credit. Credit mix is a small part of your credit score, but if you’re looking to squeeze out every possible point, it can help to have an installment loan, like a car lease, in addition to revolving credit (credit cards).
Before you go shopping
If you’re worried your credit won’t get you the lease terms you want, work on building your score.
One quick method: Whittle down high balances on your credit cards to no more than 30% of your credit limit — and lower is better. Credit utilization has a big effect on scores, and you can see a change as soon as you lower a balance and the issuer reports it to the credit bureaus.
Other ways to build your credit:
Pay every bill on time; payment history has the biggest influence on your scores.
Check your credit reports for errors that could be lowering your score and fix them.
Keep credit accounts open unless there is a compelling reason to close them, like an annual fee.