If it’s time to replace your car, whether to lease or buy a new vehicle is one of the many questions you’ll have to consider.
Ultimately, only you can decide which financing method is right for you, given your personal needs and situation. But you should make the decision only after you’ve weighed all the pros and cons of buying versus leasing – including how either move could affect your credit score. Another important consideration are the greater costs of car ownership.
Leasing and buying similarities
In terms of impact on your credit, leasing and buying are similar in many ways. Unless you choose to pay cash, both leasing and buying will require you to undergo a credit check. In the long term, compared to paying cash, either option gives you an opportunity to improve your credit score, by properly maintaining the account, making reliable payments and overall living up to terms of the lease or purchase agreement.
In your initial application, your credit score will influence whether you can get approved for a loan or lease, the interest rate and other associated financing terms. So, before applying for a lease or loan, conduct your own credit check. That way you’ll be able to make more informed decisions and leverage your knowledge in the negotiation of your lease or loan. Plus, it’s smart to know ahead of time what the auto company or lender is going to see when they pull your credit report.
You may think leases are for people who can’t get a car loan or who can’t afford loan payments, which tend to be higher per month than lease payments. Actually, if your credit score is low it can be harder to get a lease than a loan. That’s because when you lease a car, the debt is unsecured so the risk to the leasing company is greater. When you take out an auto loan, the vehicle is the security for the debt.
If a credit check shows your credit history is less than perfect, a leasing company may require you to make a larger down payment. While an auto loan may charge you a higher interest rate.
How they affect your credit
Both a lease and a loan are installment credit accounts that show up on your credit report. When it comes to their impact on you and your credit, both options work much the same way and how reliably you pay them off is of the utmost importance.
However, if you think a large monthly auto loan payment might be difficult to pay – making late or missed payments a possibility – a lower lease payment may be more manageable. And making that lower payment on time every month can have just as much positive impact on your credit score as making a larger one would.