How Car Leases Affect Your Credit

Highlights:

• A lease is a contract that allows you to use a vehicle in exchange for a monthly payment.
• Car leases appear as installment agreements on your credit reports.

When you want a brand-new vehicle, you have two options. You can buy a car, or you can lease one. Some people might prefer leases for their flexibility. But how does leasing a car affect your credit? Learn more about what a lease is and how it might affect your credit picture.

Understanding Leases and Credit

A loan on a leased vehicle is a type of installment loan. This type of debt you pay in installments, usually monthly payments. A lease is a contract that allows you to rent an asset instead of buying it outright. Under the terms of a lease contract, you (the lessee) agree to pay the owner of the vehicle (the lessor) a monthly fee. Your contract may also include extra terms. Early termination fees are common, and only apply if you end the lease early. You can also incur fees for driving the vehicle more than a certain number of miles per year.

If you want the best lease terms, you should have a credit score of at least 700 before you apply. It's possible to get an auto lease with a lower credit score. But, you may have to agree to added fees and/or a higher interest rate. In this situation, making a down payment may help you qualify for better terms. Low credit scores may also mean that you need to have a cosigner. This is a person who agrees to be responsible for your lease payments if you can no longer afford them.

Leasing vs. Buying

How leasing a car affects your credit is only one consideration. You also need to think about your driving habits and financial goals. On the surface, leasing and buying are similar. You make a payment every month until your contract ends.

The main difference between the two is that paying off a car loan gives you ownership of the vehicle. Paying off a lease doesn't automatically make you a vehicle owner. You won't own the leased vehicle unless you signed a lease-to-purchase contract instead of a standard lease agreement.

How Does Leasing a Car Affect Credit Scores Over Time?

The long-term effect of leasing a car depends on how you manage your finances. If you make your payments on time and avoid taking on too much debt, your credit scores should increase over time. If you miss payments or max out your credit cards, your credit scores may drop. Leasing a car may have a positive impact on your credit scores, as long as you make all your monthly payments on time. A car lease is adding an installment loan to your credit mix. This may help you improve your credit scores in the long run. This is important if you only have one other type of credit, such as credit cards which are revolving credit.

Leasing a car gives you the opportunity to build credit. It requires you to make monthly payments, expanding your payment history. Your payment history has a big impact on your credit scores. This is because it helps lenders determine that you're practicing responsible credit behavior. Making on-time payments helps increase your credit scores over time.

Managing Your Credit During a Lease

During your lease, track your credit and check your credit reports regularly. If you view your credit reports often, that can help you detect any inaccurate or incomplete information. Create a myEquifax™ account to get free Equifax credit reports each year. Free online weekly credit reports are available at www.annualcreditreport.com.

Make sure to verify that the car lease information on your credit report is accurate. It's also important to maintain good financial habits. Be sure to make on-time payments with your car lease. You should also pay off high-interest debt and build an emergency fund.

If you need a new car, leasing can be a viable option. Car leases are a great option if you'd rather drive a new car every few years. Plus, car leases can help you if you are looking to build your credit. To get the most out of your lease, make sure to check out the extra terms and track your credit.