“Leasing vs. Financing: Which is Better for Your Credit?”

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How Leasing a Car Can Help You Build Credit

Leasing a car can be a smart choice if you prefer lower monthly payments and want to avoid the long-term costs of vehicle ownership. Similar to an auto loan, the monthly payments for a lease will appear on your credit reports, allowing you to build credit with timely payments. If you’re considering a car lease, here’s how it can impact your credit score.

How Leasing a Car Can Help You Build Credit

Leasing a car is often compared to renting a home. However, unlike a housing lease, a vehicle lease is considered an installment loan, and the dealership or leasing company will report the account to the credit bureaus. An installment loan provides upfront financing in exchange for regular payments, typically monthly. Therefore, a vehicle lease can help you build credit similarly to an auto loan.

As long as your dealer or leasing company reports to all three credit bureaus—Experian, TransUnion, and Equifax—and you make all your payments on time, an auto lease can help build your credit history. Even after completing the lease, positive payment history can remain on your credit reports for 10 years.

However, missing a payment for 30 days or longer or defaulting on the lease can hurt your credit. A delinquency typically remains on your credit reports for seven years from the original missed payment date.

What Credit Score Is Needed to Lease a Car?

There is no universal minimum credit score required to lease a vehicle. However, dealers and auto leasing companies typically look for consumers with good credit or better. In some cases, it is possible to lease a car with bad credit, but you may face higher monthly payments. To improve your chances of approval, consider making a large down payment, paying down debt to improve your debt-to-income ratio, or asking a family member or friend with good credit to cosign the lease.

Otherwise, you may have better luck getting approved for an auto loan, albeit with a high interest rate.

Is It Better to Lease or Finance a Car?

If you’re deciding between buying or leasing a car, it’s important to understand the pros and cons of both options to determine the best choice for you.

Pros of Owning a Car

• Ownership: When you buy a car, you technically don’t own it outright until you pay off the loan. However, you can drive as many miles as you want and make modifications to the vehicle.
• More options: Lease agreements are typically for new cars, but you can get an auto loan for both new and used cars.
• Equity: As you pay down your loan, you may start building equity in the vehicle. When you’re ready to sell the car, you can use that equity toward your next vehicle or something else.
• Lower long-term costs: While auto loan payments are typically higher than lease payments, financing a car and keeping it for several years can save you more in the long run over leasing multiple cars.

Cons of Owning a Car

• Higher monthly payments: Monthly payments on a car loan tend to be higher than lease payments, making a lease agreement more affordable in the short term.
• More maintenance and repairs: New car leases typically last a few years, so you likely won’t encounter major repairs. However, if you buy a car and keep it for several years, repair and maintenance costs will increase as the vehicle ages.
• Depreciation: Vehicles typically depreciate over time, and new cars lose a lot of value in the first year. Depending on your down payment, you may end up with negative equity.

Pros of Leasing a Car

• Lower monthly payments: Because you’re essentially paying for depreciation (plus interest), you can enjoy a brand-new car at a lower monthly cost compared to an auto loan.
• Fewer repair and maintenance expenses: New cars typically don’t need major repairs or costly maintenance during the first few years.
• Less hassle: You don’t have to worry about selling your car at the end of your lease. Simply return the vehicle to the dealership, and they’ll handle the rest.

Cons of Leasing a Car

• Lack of ownership: Lease agreements typically limit how many miles you can drive each year and don’t allow modifications to your vehicle. You may also face other restrictions that you wouldn’t with an auto loan.
• Long-term costs: If you’re constantly leasing vehicles, you may always have a monthly payment. Additionally, lease companies may charge fees at the end of your lease if you exceed your mileage allotment or the vehicle sustains excessive wear and tear.
• No equity: Because you don’t own the vehicle, you won’t get any equity to put toward another car at the end of your lease.

Work to Improve Your Credit for a Lease

If you have time before you need a new car or want to improve your odds of getting approved for a lease in the future, take steps to improve your credit score. Start by monitoring your credit score regularly to understand where it stands and get updates on new accounts and inquiries. Also, check your credit report and look for areas that need to be addressed.

As you take steps now to improve your credit, you’ll be in a much better position to get approved for an auto lease the next time you’re looking for a new car.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you with all your mortgage needs!

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