If you’re in the market for a new car and are comparing financing options, it may be helpful to know that leasing a car can help you build credit. The big “if” is that this typically only applies if you manage the lease responsibly, paying your debt on time.
In most cases, you’ll need to have good credit to qualify for a lease on a car. If you have poor or no credit, you may have better luck getting an auto loan, although your interest rate may be high. Whether you opt to lease a car or buy one with an auto loan, your payment history is usually reported to the major credit bureaus. As such, making on-time and regular payments can help build your credit.
Key Points
• Leasing a car builds credit with on-time payments, reported as an installment loan.
• Good credit, often 670+, is needed for leasing.
• Buying with an auto loan is an alternative for those with lower credit.
• Having a cosigner or a large down payment aids lease approval for individuals with low credit.
• Leasing offers lower payments, the possibility of upgrades, but can include mileage limits while lacking equity.
Leasing vs Buying a Car
When you buy a car, you agree on a purchase price with the seller. You then can either pay for the full amount of the car at the time of purchase or use an auto loan for some or all of the purchase amount.
With a lease, you may put some money down, and then you will pay a fixed amount each month for the duration of the lease. Your monthly lease amount will be based on how much the car is worth at the end of the lease period.
At the end of your lease, you can either return your vehicle to the lessor or buy your leased car.
It’s also important to keep in mind that leasing a car often comes with some restrictions on how you use your car, which is not the case with buying a car. If you lease, you might have limits on the number of miles you can drive during the lease term, for instance.
Both buying and leasing a car can impact your credit score, since your monthly debt obligation and your payment history (positive or negative) are usually reported to the big three credit bureaus and show up on your credit report. A car lease is typically reported as it’s considered an installment loan.
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Pros and Cons of Leasing a Car
Beyond knowing whether leasing a car builds credit, it’s important to be aware of the pros and cons of leasing a car. By understanding the upsides as well as the drawbacks, you’ll be better able to choose between leasing or buying a car.
Here’s an overview of the major pros and cons of leasing a car to consider:
| Pros | Cons |
|---|---|
| Leasing can often offer lower monthly payments than buying the car outright. | There may be restrictions on how you use the vehicle, such as the number of miles you can drive during the lease. |
| You can potentially upgrade your car every few years. | You don’t actually own the car, so you won’t build any equity to show for your monthly payments. |
| The lease may include coverage for maintenance and some repairs. | You may get charged for excessive wear and tear on the vehicle. |
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Ways Leasing a Car Builds Credit
In most cases, your lessor will report the payments you make on a leased car to the major credit bureaus. This means that a car lease will show up as what’s on your credit report as an installment loan, and your payment history will be recorded. This can help your credit if you make on-time payments, but it may have a negative impact if you miss a payment or the lease becomes delinquent.
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Can You Lease a Car With Bad Credit?
The exact credit score needed to lease a car will depend on the lender or lessor that you use, but you generally will need to have good or excellent credit (meaning 670+) to qualify for a lease. If you don’t have a good credit history or are still working on improving your credit, leasing a car may not be the right fit for you.
When credit is extended to those with a lower score, it can be associated with a higher rate of car repossessions, meaning the lessee defaulted on the loan.
Alternatives to Leasing a Car
If you’re not able to or don’t want to lease a car, you do have some other alternatives.
Buying a Car With an Auto Loan
You might qualify more easily for a car loan rather than a lease if your credit isn’t great. While your monthly payment may be higher with a purchase as compared to a lease (since you’re buying the car rather than just leasing it for a short period of time), that may still end up being the right option for you.
You will want to keep in mind that auto loan interest rates often vary depending on your credit score. That means that someone with fair credit will likely have a higher interest rate than someone with good or excellent credit.
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Using a Cosigner
Another possibility if you can’t qualify for a lease is to use a cosigner. If you have a trusted friend or family member with good or excellent credit who is willing to cosign on your auto lease, you may stand a better chance of getting approved.
When you use a cosigner, the potential lessor can use the credit score and profile of both the primary applicant and the cosigner in determining whether to approve the lease.
Making a Large Down Payment
If you’re able to, you might consider making a large down payment as part of your auto lease. While you still may not be approved, providing a large down payment shows the potential lessor that you are serious and committed. Making a large down payment also will lower your required monthly lease payment, which may help you get approved as well.
Tips for Building Your Credit for the Next Lease
If you want to build your credit to prepare for your next car lease, there are a couple of things you can do:
• Improve your overall financial situation. For one, you can work on solidifying your finances overall, including setting up a budget and paying down debt. Remember that owning a car means you have to pay not only for your monthly car payment but also auto-related expenses like repairs, gas, and car insurance.
• Use credit cards responsibly. Responsibly using credit cards is another way to improve your credit profile. Make sure you’re paying off your monthly statement in full each and every month.
The Takeaway
Leasing a car can build credit in much the same way as taking out an auto loan. When you lease a car, it is reported as an installment loan on your credit report. Your payments (either on-time or late) are also reported to the major credit bureaus and can have a positive or negative impact on your credit score, depending on how you manage your debt.
If you’re looking to build your credit profile, another path to consider might be a credit card.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Does leasing affect your credit score?
Yes, leasing can affect your credit score, since activity is usually reported to the major credit bureaus in a very similar way to an auto loan. A lease will be reported as an installment loan, and your payment history will be included on your credit report. That means that regular and on-time payments can help build your credit score, while late payments or delinquencies can hurt your credit score.
Can I lease a car with a low credit score?
Generally, potential lessors are looking for lessees with good or excellent credit. There are a variety of reasons for this, including a higher rate of delinquencies or car repossessions associated with less favorable credit. If you have a low credit score, you may not be able to qualify for a lease and may need to consider alternatives.
What is the minimum credit score I can lease a car with?
The exact minimum credit score that you’ll need to lease a car will depend on a variety of factors. These include the specific lessor you’re working with, the car you’re considering leasing, and your overall financial situation. Many lessors are looking for people with good or excellent credit, meaning 670 or higher. If your credit is below that, you may not be able to qualify for a lease.
Photo credit: iStock/EmirMemedovski
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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