What Credit Score Do You Need To Lease a Car?
Leasing a car can offer benefits to borrowers, but they may find that they need a higher credit score than they would if they were financing via an auto loan.
Contributing Writer at Tally
May 4, 2022
If you need a new car, one of the options that you may want to consider is a lease. When leasing a vehicle, you are essentially renting it from the dealership for a couple of years.
You don’t own the car outright. In some ways, leasing is like renting an apartment as compared to purchasing a home.
There are a couple of factors worth considering when comparing a lease and a purchase. Before you think about things like your monthly payments, you’ll need to think about your credit score. It’s possible to purchase a car with no credit. But what credit score do you need to lease a car?
In this article, we’ll highlight everything you need to know about the leasing process, including what a car lease is, why it may make financial sense, how your credit impacts your ability to secure a lease and how you can go about leasing a vehicle.
What is a car lease?
A car lease is an agreement between you and a dealer to rent a vehicle for a certain amount of time. When you lease a vehicle, you will need to make a down payment as well as monthly lease payments.
The difference between a lease and a typical auto loan is that you are not paying for equity into the vehicle. With an auto loan, you make monthly payments until you’ve paid off your loan. At this point, you own the car outright. You can keep it for years after the fact.
With a lease, you will turn the car back over to the dealer at the end of your term. The only noteworthy exception to this would be if your dealer included a buyout clause in the lease agreement. If you have a buyout clause, you have the option to purchase the vehicle at the end of the term.
Does leasing a car make financial sense?
Whether leasing makes financial sense depends a lot on your personal situation and the terms of the lease. Your lender will determine the required down payment and monthly payments on the lease based on the anticipated depreciation of the vehicle and mileage.
Leases often have mileage limits. If you exceed the mileage cap, you may be charged on a per-mile basis after that, which can quickly get expensive. Your commute and how much you intend to drive the vehicle can help determine whether a lease is right for you.
When leasing, you may have lower monthly payments than you would when making traditional loan payments. Additionally, many leases require smaller down payments than those requested when financing the purchase of a new or used car. At the end of the lease, you won’t need to worry about selling or trading in the vehicle.
Furthermore, leases typically occur within the timeframe of the manufacturer’s warranty, so you won’t need to worry about paying for costly repairs. If you’re someone who enjoys driving new vehicles, leasing could potentially make better sense than financing these purchases every few years.
What is credit?
One critical component of securing a lease is your credit. Credit is your ability to borrow money. Your credit profile is typically represented in three different ways:
Credit history: This tracks how you handle money that you’ve borrowed. It can include things like how many accounts you’ve opened and your payment history — whether you make payments on time and in full.
Credit report: This summarizes your credit history. There are three credit bureaus that host your credit report — Equifax, Experian and TransUnion
Credit score: This sums up the information on your credit report into a three-digit number. The higher your credit score, the more likely you are to secure the best loan terms and interest rates. There are two credit-scoring companies — FICO and VantageScore.
What credit score do you need to lease a car?
The credit score needed to lease a car can vary from lender to lender. However, according to Experian’s State of the Automotive Finance Market Report, the average credit score used to secure a lease at the end of 2021 was 732.
If you have a lower credit score than that, it’s still possible to secure a lease, though you may face more limited options or restrictions. For instance, if you have a bad credit score, your lender may require an even greater down payment upfront. You may also face restrictions on the types of vehicles you’re allowed to lease.
As mentioned, lenders may vary in their minimum credit score requirements for leased vehicles. If you don’t have a good credit score, you may want to shop around between leasing companies to find a company that’s willing to work with you.
How do you lease a car, and who do you lease a car through?
When it comes to leasing a vehicle, there are a few options available: You can lease directly through a dealership; there are also third-party leasing companies through which you could lease. To secure a good lease deal, you’ll want to compare offers between various lenders to find the best fit for you.
Before approving your lease application, your lender will run a hard inquiry on your credit report. This may cause a short-term drop in your credit score, so it’s a good idea to limit your applications.
Many lenders offer pre-approval checks. These rely on soft credit inquiries, which won’t cause your credit score to drop. This allows you to compare offers before a hard inquiry is made.
Leasing can impact your credit profile. Both missed and on-time payments will show up on your credit report. You’ll want to compare your available lease offers to ensure that you can meet the financial obligations attached to the lease. Don’t be afraid to shop around and find the leasing agreement that best meets your financial situation.
When you’re applying for a car lease, you will need to provide a bit of documentation to your lender, including:
A driver’s license
Proof of insurance
Proof of income, in the form of pay stubs or W-2s
Your lender may also require additional information, especially if you have poor credit. For example, your lender may request to see bank statements as proof of assets and liabilities. They may also request to see proof of residency or a list of references.
Knowing your credit is the first step in securing a lease
Leasing a car can have its benefits. You don’t have to worry about the long-term maintenance of the vehicle, and your lease terms may be more favorable than auto loan terms you’d find when purchasing a vehicle.
But what credit score do you need to lease a car? Requirements can vary between leasing companies, but lenders tend to be a bit more strict when it comes to borrowers’ credit history if they are seeking to lease. There’s a good chance that you’ll need a better credit score to secure a new lease than you would for a typical car loan.
If you are worried about maintaining a good credit score that could get weighed down by existing debt, be sure to check out Tally†. Tally is a credit card payoff app designed specifically to help you pay down your credit card debt and manage your due dates, which may improve your credit-scoring factors.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.