Like many major financial ventures, leasing a car requires a healthy credit score — especially if you’re looking to receive favorable loan terms.
Leasing a car means that you can drive a brand new vehicle without officially buying it. You’re renting a car just as you’d rent an apartment.
Read on to learn more about leasing a car, the credit score needed to do so, and how you can improve your score before applying for a lease.
What credit score do I need to lease a car?
Since you’re renting it from a dealership, creditors and other lenders — including car dealers — use your score to assess your creditworthiness.
Your credit score is a three-digit number that symbolizes whether you can consistently pay your monthly installments. The score is generated by several factors, including your payment history, credit utilization, and the types of credit accounts you already have.
According to FICO, one of the most popular credit scoring models, credit scores range from 300 to 850. They also fall under one of five classifications: “poor,” “fair,” “good,” “very good,” and “excellent.” Generally, a “good” credit score is between 670 to 739.
Current data collected by Experian shows that the average credit score needed to lease a car is 732 for a new car and 665 for a used car, both of which are fairly high.
A credit score of 680 is a great score to aim for when you’re planning on leasing a car since you’ll be approved at more dealerships and have bargaining power for your lease.
The minimum eligible credit score for most car dealerships is 620 for a new car.
Leasing a car is still possible with a low credit score. The downsides are that you won’t have as much negotiating power and will most likely have to settle for a more costly up-front payment and higher interest rates. Used cars are also great options to lease if you don’t hit the 680 threshold.
Keep in mind that a perfect credit score doesn’t exist, and a bad credit score isn’t forever. There are always ways to improve your score for future leasing endeavors.
Does leasing a card build credit?
Yes, leasing a car helps you build credit. Frequent payments improve your credit score, and the three major credit bureaus — Experian, Equifax, and TransUnion — are notified of all credit activity.
Payment history accounts for 35 percent of your credit score calculation, and on-time payments reflect responsible behavior and increase your score. If you make late payments or miss them entirely, your score will drop.
4 ways to improve your credit before applying
Tip #1: Pay your bills on time. This is the easiest and most effective thing you can do to improve your financial standing.
Tip #2: Keep your credit accounts open. Open credit accounts that remain active helps to build your credit history. Only close them if necessary.
Tip #3: Check your credit report. You can’t improve your score if you don’t know what it is. You’re entitled to a free credit report from the three credit bureaus every year, so take advantage of this. You can also review your activity to check for any errors that need disputing to keep your score up.
Tip #4: Reduce your credit card balance. Credit utilization is the second most significant factor relating to your credit score, coming in at 30 percent. Making maximum payments positively impacts your score. Experts recommend trying to stay under your approved credit limit by 30 percent so that you don’t run the risk of exceeding that threshold and facing penalties.
When does leasing a car make sense?
This depends on your situation. It can be a wise option in the short term, as lease payments are usually less than traditional car loan payments. You don’t have to commit to buying a car, especially if your budget doesn’t allow it. You can even change what you’re driving every few years, since the average lease agreement lasts 24 to 36 months.
Outlined below are the benefits and drawbacks of leasing a car.
Pros
One: You can drive a brand new car.
Two: You’ll avoid paying a large down payment, which acts like a security deposit, while qualifying for lower monthly payments.
Three: Since the car will be under warranty, you likely won’t have to cover any significant repairs.
Four: Once your leasing deal is over, you can choose to lease a different car or to purchase one. Your car’s value depreciates over time, and you aren’t responsible for the difference when trading in this car for a new one.
Cons
One: You don't own the vehicle, so you’re limited by the terms of your lease agreement.
Two: When your lease contract comes to an end, you must return the car, so there may be a period where you don’t have a vehicle to get around.
Three: Similar to credit card limits, you’re usually restricted to a pre-approved mileage limit. Make sure that you know how much you’ll be driving the car so you won’t run the risk of exceeding that threshold. Otherwise, you’ll have to pay fees.
Four: You might need to pay gap insurance. This covers any costs if the car is severely damaged or stolen before the end of your leasing period.
Qualifications for different models vary, so make sure you do your research. Knowing the car brands and models that are available in your price range and how the prices and lease terms compare across dealerships is important in finding the best terms for you and your lifestyle.
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