Note that the situation for many types of debt has changed due to the impact of the coronavirus outbreak and relief efforts from the government and others. This includes AnnualCreditReport.com offering free credit reports on a weekly basis, rather than one per year, through April 2022. Check out our Student Loan Hero Coronavirus Information Center for additional news and details.
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Before you can get approved to lease a car, the dealer will check your credit score. According to Experian, the average credit score among consumers who leased a car in the second quarter of 2020 was 729.
While you can still get approved with a lower score, you might be subject to higher interest rates. To learn more about the credit score needed to lease a car, as well as how you can improve your credit to meet requirements, let’s answer the following questions:
- What is a car lease?
- Do you need a certain credit score to lease a car?
- Should you lease a car at all?
- How can you improve your credit before applying?
- What research do you need before you lease?
- What’s your best financial decision when leasing a car?
A car lease is a type of installment loan. When you lease a car, you are essentially renting the car for a monthly fee for the term of the lease. At the end of the term, you can buy the car for the calculated buyout price or turn it back in.
When you purchase a car instead of leasing it, you own the entire value of the car. Whether you pay in cash or apply for a loan, once you pay it off, you own the car. The car you’ve paid for is an asset in your name. You can keep driving it without payment or sell it.
At the end of a lease, on the other hand, you have nothing but several years of payments made. You’ll have the option of buying the car or trading it in for a new model on a new lease agreement.
You may also have an improved credit score if you always made your car lease payments on time. That’s right, a car lease can help you increase your credit score, since lenders usually report lease payments to the major credit bureaus (TransUnion, Experian and Equifax).
If your credit score is 740 or above, your score is considered very good by most lenders. They will likely offer you a lease with their best rates.
According to LeaseGuide.com, a score between 680 and 739 is considered prime and will be approved. Scores from 620-679 are “near-prime” scores. People with these scores will likely be approved but might incur a higher interest rate.
Scores below 619 classify you as a “subprime” borrower. You will have to pay a much higher rate, if you are approved at all.
Before you sign on the dotted line, be sure a lease makes sense for your financial situation.
Buying a new car every few years does not make financial sense. The biggest loss of value happens when you drive the car off the lot.
Unlike a home, which usually goes up in value over time, a car only goes down in value. This is why a car is considered a depreciating asset. However, if you were to buy a lightly used car instead of a new one, you don’t have to worry about significant depreciation.
If you like having a new car every two or three years, leasing a car is often better than buying one. Leasing puts that loss of value on the leasing company rather than your personal balance sheet.
That said, you might have to pay certain lease fees and adhere to mileage restrictions (on a lease agreement, you typically have to agree not to drive more than a certain amount of mileage each year).
What’s more, the credit score needed to lease a car might be higher than the one needed to borrow a car loan and purchase it. According to Experian, while car lease customers in the second quarter of 2020 had an average credit score of 729, car purchasers who borrowed a loan to finance the vehicle had an average score of 657.
Whether you are looking to buy with a loan or lease a car, a higher credit score will give you better terms. You can take the car home with a lower down payment and will pay a lower interest rate.
Here are some steps you can take to improve your credit to improve your lease terms:
- Make on-time payments. The biggest factor in calculating your credit score is your payment history. Be sure to always make at least the minimum payment on time for all your monthly bills.
- Pay off credit cards. Your credit utilization rate, also known as your credit utilization ratio, is another big factor in determining your credit score. Paying off credit card balances is one of the fastest ways to improve your credit score. Try to keep your credit utilization ratio under 30%.
- Carry a mix of credit. It’s usually better to have a mix of different credit types rather than just one. That said, don’t open a bunch of credit cards or take out loans you don’t need simply to diversify your credit.
- Keep your accounts open, unless they’re costing you. Accounts that have a long history of on-time repayment will be more valuable than more recent ones, so keep your old accounts open unless there’s a compelling reason to close them, like a big annual fee.
- Avoid applying for new loans. This is a bit of a Catch-22. You have to apply for new credit to get a lease or a car loan, but applying for new credit lowers your score. Limit your applications to only when you need the credit card or loan. Don’t apply for every offer that comes along.
Improving your credit score is a slow process, but it is something you can do. My credit score has gone up over 115 points since I started tracking it, but it has taken years to build up the 830 credit score I have today. Always think long term when dealing with your credit.
Not sure what your credit score is? Here are five ways to check your credit score for free.
Besides checking your credit score, there are other steps you can take before you lease a car to make sure you’re getting your best deal.
- Research the car you’re interested in. Compare deals online so you know what’s a fair price, and what’s not. You could also be flexible with what car you’re looking at, since prices on different vehicles can vary widely.
- Cast a wide net. By shopping around at multiple dealerships in your area, you can find a lease agreement with your best terms and take advantage of any special sales or rebate offers.
- Try negotiating. It’s worth asking if the dealer can reduce fees or increase your annual mileage. Just as dealers negotiate on car purchases, they typically have the power to negotiate on car lease agreements, too.
- Don’t make your down payment too big. Although a bigger down payment can reduce your monthly payment, you don’t want to invest too much money in the vehicle if you don’t plan on purchasing it when your term is up.
While shopping around and negotiating can save you money on a lease, improving your credit score is still one of the most important factors in getting an affordable deal.
Having a new car feels great. However, keeping up with the Joneses — or any neighbor who got a shiny new Mercedes-Benz — shouldn’t drive your financial decisions.
Focus on the numbers instead. If a new car lease makes sense for you financially and you have the right credit score, nothing can hold you back.
If you’re thinking of buying a car rather than leasing, check out these cost-effective alternatives to pricey car loans.
Rebecca Safier contributed to this report.
Interested in a personal loan?Here are the top personal loan lenders of 2022!
|Lender||APR Range||Loan Amount|
|5.74% – 20.28%1||$5,000 - $100,000|
|4.37% – 35.99%||$1,000 - $50,000|
|5.94% – 35.97%*||$1,000 - $50,000|
|99.00% – 199.00%2||$500 - $4,000|
|5.99% – 24.99%3||$5,000 - $40,000|
|7.99% – 20.88%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $36,500|
|10.68% – 35.89%6||$1,000 - $40,000|
|9.95% – 35.99%7||$2,000 - $35,000|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
Fixed rates from 5.74% APR to 20.28% APR APR reflect the 0.25% autopay discount and a 0.25% direct deposit discount. SoFi rate ranges are current as of 1/18/22 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. Lowest rates reserved for the most creditworthy borrowers. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, income, and other factors. See APR examples and terms. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
2 Includes AutoPay discount. Important Disclosures for Opploans.
Direct Deposit required for payroll.
Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.
3 Includes AutoPay discount. Important Disclosures for Payoff.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 10.68% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 9.56% and a 5.00% origination fee of $300 for an APR of 13.11%. In this example, you will receive $5,700 and will make 36 monthly payments of $192.37. The total amount repayable will be $6,925.32. Your APR will be determined based on your credit at time of application. The origination fee ranges from 2% to 6% (average is 4.86% as of 7/1/2019 – 9/30/2019). In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,001 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Avant.
*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state.
**Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33.
Based on the responses from 7,302 customers in a survey of 140,258 newly funded customers, conducted from August 1, 2018 – August 1, 2019, 95.11% of customers stated that they were either extremely satisfied or satisfied with Avant. 4/5 Customers would recommend us. Avant branded credit products are issued by WebBank, member FDIC.
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
Personal loans made through Upgrade feature APRs of 5.94%-35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Accept your loan offer and your funds will be sent to your bank or designated account within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes the transaction. From the time of approval, funds should be available within four (4) business days. Funds sent directly to pay off your creditors may take up to 2 weeks to clear, depending on the creditor. Personal loans issued by Upgrade’s lending partners. Information on Upgrade’s lending partners can be found at https://www.upgrade.com/lending-partners/.