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Does Leasing a Car Build Your Credit Score?

Leasing a car can have a positive impact on your credit score, as long as you make all your monthly payments on time.
A loan on a leased vehicle is a type of installment loan. This is the type of debt that is paid in installments, typically monthly payments. Other examples of installment loans include car loans (whether purchased or leased), mortgages, student loans, and personal loans.
According to the credit bureau Experian, an additional benefit of an installment loan can be enhancing your credit mix — the number and variety of loans (or accounts) that appear on your credit report.
Most lenders will report the payments you make to the three major credit bureaus (Experian, TransUnion, and Equifax), and credit scoring companies will use this information and your ability to repay debt to calculate your credit score. Making on-time payments to installment loans will boost your credit score.
For over 60 years, the Credit Union of Southern California (CU SoCal) has provided, quick pre-approvals, no application or funding fees, and more!
Call CU SoCal at 866.287.6225 to schedule a no-obligation loan consultation, or apply online today!

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Why Credit Score Is Important

Credit is a central part of any loan application process, whether you’re applying for an auto loan, a home mortgage, or a credit card. All lenders, including credit unions and banks, will look at the applicant’s credit score and credit history to determine their likely ability to repay the loan.
People with a higher credit score have generally paid loans and debts-on time and have a good credit history, and are therefore categorized by lenders as low risk of defaulting or skipping payments. Individuals with a low credit score are seen as high risk for late payment or non-payment and will typically be charged a higher interest rate for the loan.
Here’s how FICO ® Scores (the most popular credit scoring model, used by most lenders to evaluate an applicant's creditworthiness) ranks credit-related factors to create 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 at once.
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 Does Leasing a Car Build Your Credit Score?

Adding an installment loan to your credit mix can boost your credit score, especially if you only have one other type of credit, such as credit cards, also referred to as revolving credit.
For car shoppers who want to boost their credit score before applying for a loan, consider getting a CU SoCal Credit-Builder Loan.
Once you apply, CU SoCal establishes a share certificate for $1,000, 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 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.
When lenders look at a potential borrower’s credit score and see a high score, they interpret that borrower as being at low risk for defaulting on a loan, and they will thus be more likely to offer a loan at a lower interest rate.
Leasing a Car with Bad Credit
As with all loans, the higher your credit score, the lower the interest rate you’ll pay on the loan amount. According to Experian data, the average credit score for a car lease in the second quarter of 2020 was 729.
While you can lease a car with a lower credit score, you’ll likely pay a higher interest rate to do so. Having a low credit score or bad credit could prevent you from getting a lease or cost you more in interest over the course of the loan, and may even limit your choice of vehicles. This is because lenders associate low credit scores with higher risk of non-payment.
If you have less than perfect credit, you can learn how improve your credit score.

Leasing Vs. Buying a Car

As you may have guessed, there are advantages and disadvantages of leasing vs. buying a car. Here are some to consider:
Advantages of Leasing a Car:

  • Lower down payment. Putting more money down on a lease doesn’t save you money as it would with a car purchase. This means you can put less down and keep money in the bank.
  • Lower monthly payments. Lease payments tend to be lower because you’re essentially “renting” the car vs. paying more to purchase.
  • Get more for your money. Because monthly payments are generally lower than monthly car purchase payments, you may be able to afford high-end technology features that would be too costly on a purchase.
  • Avoid costly repair bills. At the end of the 2-4 year lease term you’ll return the car to the dealership, thus avoiding high-mileage repairs to the engine or transmission that are common with older cars.
Advantages of Buying a car:
  • Build equity with ownership. Assuming you use a car loan to make the purchase, when the loan is paid-off you own the vehicle. This means you can still make money by selling it or getting trade-in value.
  • Sell any time. Even if you still owe money on a car loan, you can sell the car and pay off the balance of the loan. Most leased vehicles will cost you a penalty for early termination of the lease contract.
  • No mileage limit. Leased cars have a mileage limit and you’ll pay extra if you exceed the limit.
  • Can customize. If you like to customize your cars, you can do so with a car you purchase. Cars that are leased cannot be altered by the lessee.
Still not sure which option is best for you? Check out our article on the "Pros and Cons of Leasing vs. Buying a Car."

Other Car Leasing Factors to Consider

 The credit bureau Experian share these tips with consumers:
Ownership: Unlike a traditional auto loan, the end of your lease payment period does not result in you taking ownership of the car; you'll have to return it to the dealership. You might have the option to keep the car, but you may end up paying more than if you had bought it in the first place.
Costs: Leasing a vehicle can get you a lower monthly payment than financing a car. If what you want is a lower monthly payment on a brand-new car, leasing might be the smarter way to go—especially if it frees up money you can then put toward other debts.
Restrictions on Use: With lease agreements, however, your agreement will be long and complicated, and you'll run into several limitations and restrictions that can cost you if you're not careful.
For example, you may be prohibited from making any changes to the vehicle, even if it's just to tint the windows. The dealership will likely expect the vehicle to be returned in essentially "showroom condition" and fees can follow if it's not.

Is Leasing a Car Worth it?

That depends... if you plan to keep the car short-term and can meet all of the lease agreement terms, especially the mileage agreement, then yes, leasing can be worth it.
Many people prefer to lease because leasing allows them to have a brand new car at the end of every lease term, typically every two to three years.
After you’ve done your research and crunched the numbers, the best way to choose between leasing and buying is to go with the option that works best for your driving style and your budget.

CU SoCal Auto Loans

Drivers who opt to buy a car vs. lease can be confident they’re in good hands with an auto loan from CU SoCal. Our auto loans feature:
  • Up to 120% financing for new and used vehicles.
  • Quick pre-approvals.
  • Extended terms up to 84 months for the lowest possible monthly payment.
  • A personal auto-buying concierge service.
  • Low-cost loan protection add-ons.
  • No application or funding fees.

Click here for more details on CU SoCal auto loans.

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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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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