What Credit Score Is Needed to Lease a Car?
In general, it’s best to have a credit score that’s as high as possible when trying to lease a car. The minimum required score may vary depending on the lender you talk to.
Credit unions, banks and car manufacturers all provide auto lease loans and each lender has its own criteria on which they qualify a borrower for a loan.
According to Experian data, the average credit score for a car lease in the second quarter of 2020 was 729. But don’t worry if you have less than perfect credit.
For over 60 years, Credit Union of Southern California (CU SoCal) has provided quick pre-approvals, no application or funding fees, and other great benefits for our valued Members.
Call CU SoCal at 866.287.6225 to schedule a no-obligation loan consultation, or apply online today!
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How Does Car Leasing Work?
The main difference between leasing and purchasing is that when you purchase a car using a loan, you are making payments toward your eventual ownership of the vehicle, and it becomes yours once the car loan is paid in full.
With an auto lease, it’s more like paying to rent the car short-term. When the term or duration of the contracted lease period ends, the vehicle must be returned to the leasing company or it may be purchased for its residual value.
Whether you get your leased car loan from a credit union, bank, or car manufacturer, the monthly loan payments are mainly calculated based on vehicle depreciation — the difference between the value of the car when it’s new and what the lender anticipates its value will be at the end of the lease term.
Edmunds.com explains, residual value is important because the higher its percentage is, the lower the payment.
With residual value having such a large impact on the loan payment, making a large down payment on a leased vehicle is not going to save you as much money as it would on a car purchase, and a down payment won’t be a major factor in calculating the monthly loan payment.
Why Credit Score Is Important
Credit is a central part of any loan application process. All lenders, including credit unions and banks, use the applicant’s credit score and credit payment history to determine that individual’s ability to repay the loan.
For lenders it’s about borrower risk — can the lender rely on you to repay the loan on-time and in-full? People with a higher credit score are categorized as low risk, and those with a low credit score are seen as high risk for late payment or non-payment.
Less than perfect credit isn’t a deal-breaker. Many lenders will still give you a loan, however, you’ll likely pay a higher interest rate.
What FICO® Score is Needed to Lease a Car
Credit scores are determined based on information in your credit reports. Factors including how often you use credit, how many credit lines you have open, and whether or not you pay loans and other outstanding debt on-time will all play a part in your credit reports and credit score.
Anyone with consumer debt, such as credit cards, has a credit report on file at the three major credit bureaus: Experian, Transunion, and Equifax.
Credit scoring companies, including FICO®, use the information contained in credit reports to calculate a person’s credit score.
When consumers acquire new debt, pay off or pay down existing debt, take out loans, and apply for new credit, these activities are reported to the credit bureaus and will affect the credit score. Credit scores fluctuate up and down daily and weekly as we make credit purchases and pay off debt.
Failure to make on-time loan payments has a negative impact on credit reports and scores. While a missed or late payment or two generally won’t have a great impact, frequent late payments or non-payment of loans and other debt will result in a bad credit score that could prevent you from getting approved for a loan.
Generally, you won’t see large fluctuations in your credit score unless you take on large credit like a home mortgage or fail to pay a mortgage or car loan.
Here’s how FICO® (the most popular credit scoring model, used by most lenders to evaluate an applicant's creditworthiness) ranks these various factors to create our credit scores:
Payment History: 35%
The first thing any lender wants to know is whether you've paid past credit accounts on time. This helps a lender figure out the amount of risk it will take on when extending credit. This is the most important factor in a FICO Score. Be sure to keep your accounts in good standing to build a healthy history.
Amounts Owed: 30%
Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO Score. However, if you are using a lot of your available credit, this may indicate that you are overextended—and banks can interpret this to mean that you are at a higher risk of defaulting.
Length of Credit History: 15%
In general, a longer credit history will increase your FICO Scores. However, even people who haven't been using credit for long may have high FICO Scores, depending on how the rest of their credit report looks.
New Credit: 10%
Research shows that opening several credit accounts in a short amount of time represents a greater risk—especially for people who don't have a long credit history. If you can avoid it, try not to open too many accounts too rapidly.
Types of Credit (Credit Mix): 10%
FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Don't worry, it's not necessary to have one of each.
Credit Inquiries
The only inquiries that count toward your FICO Scores are the ones that result from your applications for new credit. Your scores do not count "consumer-initiated" inquiries, requests you have made for your credit report in order to check it.
They also do not count "promotional inquiries," requests made by lenders in order to make you a "pre-approved" credit offer. Also not counted are "administrative inquiries," requests made by lenders to review your account with them. Requests coming from employers are not counted either.
How to Improve and Build Your Credit Score
If you’re anticipating making an expensive purchase for which you’ll need a loan, the earlier you start to increase your credit score the easier it will be to get approved for a loan. Whether you’re buying a car or a home, here are eight tips for building credit.
One way to start building credit is taking out a Credit Builder Loan, created to help individuals who have a low credit score or no credit history.
With the CU SoCal Credit Builder Loan, a share certificate for $1,000 is established in the borrower’s name, and while you do not receive funds up-front,
after making on-time payments for one year, you receive $1,000 cash. Credit Builder loans build your credit score because your payments are reported each month to all three major credit bureaus. Credit scoring companies, including FICO, will see the loan in your credit report and give you points for adding to your credit mix and making on-time payments.
Will Leasing a Car Help My Credit Score?
Making on-time payments to pay down outstanding loans and debt will increase your credit score. Credit bureaus and credit scoring companies look favorably on installment loans paid on time, as it shows that the borrower is able to manage debt. As a result, your credit score will increase.
Is Leasing a Car Worth it?
Because leasing is a temporary ownership of a car (generally two to four years) it’s important to decide what you want out of a car and how long you would like to own it.
People who prefer to drive a new vehicle choose to lease. Owning a car short term increases the chances that you can avoid having to make costly repairs that come with older cars.
Some people choose to lease in order to see how they like driving a particular make or model car before committing to a purchase.
All car leases come with the option to purchase the vehicle at the end of the lease term, so if you’ve come to really enjoy your leased car, it can be yours!
Is leasing worth it? While a leased vehicle may cost less per month to own, in the long-run, purchasing a car is more cost-effective since you’ll own it once the loan is paid off and you’ll likely get to drive it for many years.
Should you decide you no longer want to keep it, you’ll have the flexibility to sell it or trade it in. When you purchase a car, you can drive it as much as you need to.
With a leased vehicle there are mileage limitations, so be sure to select the mileage option that reflects your driving habits, or you could end up paying more for miles over your contracted limit. Is leasing worth it? That’s for each driver to decide based on their driving needs and budget.
Leasing Vs. Buying a Car
The choice between leasing and buying is a personal and economic decision, so be sure to think carefully about your driving needs, then comparison shop and run the numbers before settling on a strategy.
To help you decide between leasing or buying, take a look at our article on the Pros and Cons of Leasing vs. Buying.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our auto loan experts.
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