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If you purchase it, either in cash or through financing, the car is yours. Even if you get a loan to pay for it, you’ll eventually pay that loan off (hopefully) and own the car outright. If you choose to lease it, however, you’ll pay less each month, and in two or three years you can simply turn it back in and walk away if you’d like—but you’ll be back to square one and needing another vehicle.
Leasing has become a highly convenient way for people with excellent credit to get a new car or truck without having to get an auto loan. There’s just one catch—leasing a vehicle is still considered a loan when it comes to your credit report, and it affects your credit in exactly the same way. That could be excellent for you—or it could be a bad thing. It all depends on how you manage it.
How Leasing a Car Affects Your Credit Score
When you get a car loan, such as through a dealer, the total cost of the loan is reported to the credit bureaus, as well as your payment history for that debt. The credit reporting agency, along with everyone who looks at your credit report, will see how much you owe, what the amount of your monthly payment is, and whether you’ve been making those payments on time.
The same thing happens when you lease a vehicle. The total of the lease obligation is reported, and it’s seen as a loan. After all, you’re making payments each month in return for a car.
The way creditors see an automotive lease is no different than a regular auto loan, because for all intents and purposes, they’re handled the same way. There is a hard credit inquiry done when you apply for the lease, which affects your credit for up to two years. Once you’re approved, you’ll be making monthly installment payments just like a loan—except those payments aren’t going toward your ownership of the car. They’re basically a long-term rental fee.
The good news is that making your payments on time throughout the lease can offer positive benefits to your credit score by building good history and showing that you can handle monthly obligations. The bad news, however, is that it can also hurt you.
Amount of Debt
The full amount of the lease shows up as debt on your credit report. If you lease a $50,000 truck, for instance, you will then show another $50,000 of debt. That can affect your ability to get credit for other things as long as the lease is active and may push your score down if it increases your debt past acceptable ranges for debt-to-income ratio.
Credit Account Mix
In order to maximize your credit score, you should have a mix of different types of credit. Instead of just a handful of credit cards, you want to have an installment loan or mortgage along with them. If you have an auto lease, you’re using part of the credit you qualify for and locking it down in an arrangement that you may not be able to afford.
Age of Accounts
One of the things that affects your credit score is the average age of your accounts. Every new account drops that average, and the newer your average account age is, the lower your credit score will be. Creditors like to see long-term relationships with debt that show a longstanding payment history and a past pattern of being financially responsible.
It goes without saying that your future creditors, landlords, and even employers will want to see that you make payments on time. It shows character, responsibility, and financial health. A stellar payment history on a car lease will go a long way to show that you follow through on obligations.
A poor showing in this area, however, can make a lender refuse to work with you. In fact, if you need to terminate your lease early, it is treated basically like defaulting on a loan—resulting with your credit score taking a big hit.
Leasing can be a great way to get a new car every two or three years and is less expensive than buying. If you’re doing it because you don’t want a car loan on your credit report, leasing isn’t a good option since it’ll show up just like any other auto loan.
Whether you decide to buy or sign a lease, be sure to stay within your budget, strike a good deal, and keep your payments on time. Doing this will help your credit no matter what.
Author: Jeff Gitlen