An auto lease is an agreement between you and a creditor where you make fixed monthly payments in exchange for access to a car. It’s different from an auto loan in that you don’t actually own the vehicle; you’re just renting it, the way you’d rent an apartment from a landlord.
Whether to opt for an auto loan or a lease is a big decision, but for the purpose of your credit, they’re essentially the same. Auto leases affect your credit score just like auto loans do, which means that leasing a car can build credit. The reverse is also true—it will hurt your credit if you miss payments on your lease.
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How can an auto lease build your credit?
When you take out an auto lease, your lessor (the company that’s leasing the car to you, often your auto dealer) will report all of your payments to the credit bureaus that produce your credit reports.
Provided you don’t miss any of your monthly payments, your positive payment history on the lease will build your credit over time. Similarly, if you make any late payments or stop paying the lease altogether, that will also be recorded and will hurt your credit score.
Why do auto leases show up on your credit report?
Most of the time, rental agreements don’t show up on your credit report, so it might be a surprise to learn that auto leases do.
Auto leases show up due to a quirk of the credit reporting system: the credit bureaus consider them to be loans, not rental contracts.
From your perspective as a consumer, auto leases and loans are very different—mainly in that once you’re finished paying off an auto loan, you’ll actually own the car, which obviously isn’t the case with a lease. But as far as the credit bureaus are concerned, they’re variations on the same type of credit account.
Other effects of auto leases on your credit score
The main impact of an auto lease comes from how it affects your payment history, but it can have other effects on your credit, both positive and negative.
- Positive: On the plus side, your auto lease may increase your credit mix, which measures the diversity of the types of credit that you have. It’s good to have both credit cards and loans, so if your auto lease is your first account that’s classified as an installment loan, it will improve your score.
- Negative: On the flip side, when you first apply for your auto lease, your lender will conduct a credit check known as a hard inquiry, which will take a few points off your credit score.
In general, when you take out any loan, the immediate effect on your credit score will be negative, although not severely so. The longer you have the loan and the more you pay it down, the better for your score it will be. Auto leases are no exception.
Is it possible to lease a car with bad credit?
Remember that with a lease, a company is lending their actual property to you. In a way, this is actually risker for them than an auto loan, where they’re “only” lending money.
If you have bad credit (or no credit score at all), you have two options.
Make the lease more attractive for the lender
Getting an auto lease with bad credit isn’t impossible, it’s just difficult. You’ll need to do your best to set your lender’s mind at ease and convince them that you’re a reliable person who won’t stop making payments (or do anything to damage their car!)
Try the following:
- Offer a larger down payment: If you put down more money upfront on the lease, it will reduce the risk you’re asking your lender to take on, which will make them more likely to agree.
- Find a cosigner: If you can get someone with good credit to guarantee your loan, that will also make your lender feel more secure. However, this is a big thing to ask of somebody—if you miss payments on the lease, they’ll be responsible for making them up. If you get a cosigner, make sure it’s someone you trust, and do your part by making all your payments on time.
- Improve your credit score: If you do what you can to fix your credit in the short term and also work on rebuilding your credit over time, eventually you’ll bump your score back to the point that it won’t give lenders any pause.
The third option is the most difficult solution, but ultimately it’s also the most rewarding. Instead of worrying about whether your auto lease will build your credit, consider taking steps to improve your score before you apply.
This will make it easier to get the lease (and the car!) that you want, and it will save you money by making it possible to get a better deal.
Pursue an auto loan instead
As mentioned, when you have poor credit, it’s actually easier to get an auto loan than a lease. There are plenty of car loans for subprime borrowers out there.
It’s worth noting that you probably won’t be able to get a very good auto loan—any loan you qualify for will have a high interest rate and may have other unfavorable terms, such as additional fees. If you don’t need a car urgently, it would still be better to spend some time working on your credit before applying.
If you do choose to get an auto loan before improving your credit, you can start by exploring the options listed in the table below.
Is it better to buy a car or lease one?
As you know, auto loans and leases have about the same effect on your credit. However, they’re not equally good for your finances in general. In most situations, buying a car is a better deal than leasing one.
The reason for this is fairly obvious: when you finish paying off your auto loan, you’ll actually own the car. With every payment you make, you’ll build equity in it (increase the amount of it that you own).
In contrast, when you pay an auto lease, you’re not building equity in anything. Your dealership or lender owns the car the entire time—you’re just paying to use it for a while.
Additionally, auto leasing comes with the following downsides:
- It’s more expensive: Although auto leases usually have lower monthly payments than loans, they’re more expensive in the long run since you never reach a point where you own the car and don’t have to pay anymore.
- Restrictions on use: There are clauses in most auto lease contracts that limit how you can use the car. For instance, they might limit you to driving a certain number of miles per year (often to 12,000–15,000). 1 When you actually own the vehicle, you’ll face no such restrictions.
Is leasing a car ever worth it?
There’s really just one scenario where it makes sense to lease instead of buy: you want a specific car and can’t afford the loan payments on it.
Although in the long term, leasing costs more, it’s cheaper in the short term. You might be able to afford the rental payments on the car that you want, even if buying it would be too expensive.
From a purely financial standpoint, this is still a poor choice. It would be better to compromise on the car you want and just buy a cheaper one. That said, if you have your heart set on a particular car that’s out of your price range, leasing it can be a way to get it—at least for a while.