Does Leasing a Car Build Credit?

Quick Answer

Leasing a car can help you build credit just as an auto loan can. However, while auto loans are accessible to consumers across the credit spectrum, it can be difficult to get approved for a lease if your credit score is less than stellar.

Woman Considering Buying a Car

Leasing a car instead of buying it can be a good decision if you prefer lower monthly payments and want to avoid the long-term costs of vehicle ownership.

As with an auto loan, the monthly payments associated with a lease agreement will appear on your credit reports. This allows you to build credit with on-time payments. If you're considering a car lease, here's what to know about how a lease can impact your credit score.

How Leasing a Car Can Help You Build Credit

Leasing a car is often compared to renting a home instead of buying one. But unlike a housing lease agreement, a vehicle lease agreement is considered an installment loan, and the dealership or leasing company will report the account to the credit bureaus as such.

An installment loan is a type of loan that provides upfront financing in exchange for regular payments, typically in monthly installments. In other words, a vehicle lease agreement can help you build credit in the same way an auto loan can.

As long as your dealer or leasing company reports to all three credit bureaus—Experian, TransUnion and Equifax—and all your payments are made on time, an auto lease can certainly help to build your credit history. Even after you complete the lease, positive payment history can remain on your credit reports for 10 years.

A car lease can also hurt your credit, however, if you miss a payment for 30 days or longer or you default on the lease agreement altogether. A delinquency typically remains on your credit reports for seven years from the original missed payment date.

What Credit Score Is Needed to Lease a Car?

There's no universal minimum credit score required to lease a vehicle. However, dealers and auto leasing companies typically look for consumers who have good credit or better.

In some cases, it is possible to lease a car with bad credit, but you may wind up with higher monthly payments. To improve your odds of getting approved, you can make a large down payment, pay down debt to improve your debt-to-income ratio or ask a family member or friend with good credit to cosign the lease.

Otherwise, you may have more luck getting approved for an auto loan, albeit one with a high interest rate.

Is It Better to Lease or Finance a Car?

If you're trying to decide between buying or leasing a car, it's important to understand the advantages and disadvantages of both options to determine the right move for you. Here's what to consider.

Pros of Owning a Car

  • Ownership: When you buy a car, you technically don't own it outright until you pay off the loan. However, you'll still enjoy the benefits of ownership while making payments. For example, you can drive as many miles as you want and even make modifications to the vehicle.
  • More options: Lease agreements are typically reserved for new cars, but you can get an auto loan for both new and used cars.
  • Equity: As you pay down your loan, you may start building equity in the vehicle—the difference between the car's value and your loan balance. When you're ready to sell the car, which you can do before it's fully paid off, you can put that equity toward your next vehicle or use it for something else.
  • Lower long-term costs: While auto loan payments are typically higher than lease payments, financing a car and keeping it for several years can save you more in the long run over leasing multiple cars because your auto loan payments will stop after you pay off the loan.

Cons of Owning a Car

  • Higher monthly payments: Monthly payments on a car loan tend to be higher than lease payments, making a lease agreement more affordable in the short term.
  • More maintenance and repairs: New car leases typically only last a few years at most, so you likely won't run into any major repairs. If you buy a car and keep it for several years, however, repair and maintenance costs will increase as the vehicle gets older and the mileage increases.
  • Depreciation: Vehicles typically depreciate over time, and new cars, in particular, lose a lot of value in the first year. Depending on how much you put down when buying the car, you may end up with negative equity.

Pros of Leasing a Car

  • Lower monthly payments: Because you're essentially just paying for depreciation (plus interest), you can enjoy a brand-new car at a lower monthly cost compared with an auto loan.
  • Fewer repair and maintenance expenses: Because new cars typically don't need major repairs or costly maintenance during the first few years, you don't have to worry about your expenses going up as the vehicle gets older.
  • Less hassle: You don't have to worry about selling your car at the end of your lease, which can be a time-consuming process. Simply return the vehicle to the dealership, and it'll take care of the rest.

Cons of Leasing a Car

  • Lack of ownership: Lease agreements typically limit how many miles you can drive each year, and they don't allow modifications to your vehicle. You may also be subject to other restrictions that you wouldn't need to worry about with an auto loan—and lease agreements can be complex.
  • Long-term costs: If you're constantly leasing vehicles, you may always have a monthly payment. In contrast, when you pay off an auto loan, there is no monthly payment unless you decide to finance a new vehicle. Additionally, lease companies may charge fees at the end of your lease if you exceeded your mileage allotment or the vehicle sustained excessive wear and tear.
  • No equity: Because you don't own the vehicle, you won't get any equity to put toward another car at the end of your lease.

Work to Improve Your Credit for a Lease

If you have time before you need a new car or you simply want to improve your odds of getting approved for a lease in the future, take some steps to improve your credit score.

Start by monitoring your credit score regularly to understand where it stands and get updates on new accounts and inquiries. Also, check your credit report and look for areas that need to be addressed.

As you take steps now to improve your credit, you'll be able to put yourself in a much better position to get approved for an auto lease the next time you're looking for a new car.