Should you lease your next car, or should you buy it? It can be a tricky decision, with various positive and negative aspects to both options. An important factor ― one that some people neglect to consider ― is how each choice can affect a credit report.
It turns out that leasing and buying can have a similar impact on your credit score, so long as you’re able to make all of your payments in full and on time.
How Leasing Helps (and Sometimes Hurts) Credit Reports
Leasing a car can help you to improve your credit report. And, if you have no credit history to speak of, a leased automobile can assist you in creating one.
When you lease, you agree to pay a certain amount per month over a certain period of time. If you’re never late when paying, your creditor will let the major credit bureaus know, and it should strengthen your score.
A car lease is an example of an installment account. Whenever you’re paying sums of money in equal increments over a preset duration, you have such an account. Mortgages and student loans are two other kinds of installment accounts.
A full 35 percent of your credit score is based on the payments you make to your lenders. If you only have a few creditors, your car lease can have a significant impact on your score. In fact, if your score is lower than you’d like it to be, you might try leasing a car for the sole purpose of raising it.
Of course, if you miss one or more of your lease payments, you may lower your credit score. Before taking out a lease, then, take a hard look at your income, expenses and monthly budget. Be absolutely sure that you have the means to make your payments. Moreover, don’t forget that you’ll be responsible for paying for your vehicle’s upkeep.
Buying a Car
What about taking out a car loan in order to purchase an automobile? How might that course of action affect your credit score?
Well, the same basic principles are at play here. When you make your payments to your creditor on time, your credit score will go up, and when you don’t, it’ll go down.
The main difference is that with a car loan, your monthly installments would almost certainly be higher than they would be with a car lease.
What’s more, just as your auto loan payments can affect your credit score, your credit score can affect your payments. That is, if you have a good or outstanding score when you apply for such a loan, you’ll be eligible for a lower interest rate than you would be if your score were less than optimal.
With a lower interest rate, your car loan payments will present less of a financial burden, making it more likely that you’ll be able to pay all of them and ultimately raise your credit score. As you can see, when it comes to personal finances and credit scores, things so often get either progressively better or progressively worse.
Taking out an auto loan can improve your credit report in another way. Credit bureaus like it when people diversify their sources of credit. Specifically, they tend to reward individuals for relying on installment credit as well as revolving, or renewable, credit. A credit card is an example of the latter. Thus, if credit cards are currently the only kind of credit that you’re taking advantage of, you might find that securing a car loan automatically boosts your credit score by a few points or so.
Leases and Loans: Risks Usually Worth Taking
Whether you’re trying to obtain an auto loan or a lease, potential creditors may first conduct a hard inquiry into your credit history. And, every time such an inquiry takes place, your credit score will go down a little. With that in mind, it’s wise not to apply for too many leases or loans. Instead, do some research into available lenders, and then approach one reputable creditor at a time.
Also, in some cases, the fact that you’ve taken out a new account ― be it a lease or a loan ― can slightly ding your credit score. That’s because credit bureaus realize that leases and loans bring people new financial risk. Nevertheless, over the long haul, submitting all of your payments on time will have a net positive effect on your credit report.
As a final word of advice, it often makes sense to consult a credit repair company before you apply for an auto lease or loan. The experts at such an organization can scrutinize your credit reports and clear up any errors and misunderstandings that are damaging them. That way, your score will increase, and you’ll obtain the most favorable terms possible. Those pros can also answer any questions you have about leases and loans. Soon enough, you’ll be behind the wheel of a new vehicle, and you won’t have any extra financial worries to distract you as you cruise around.