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Car Leasing and Credit Scores – All You Need to Know

Graphic showing credit scoring

If you’re interested in car leasing, it’s important to recognise the importance of your credit score, both in terms of securing your initial lease agreement and the impact that this will have on your credit score thereafter.

In this guide, we’ll explain more about what a credit score is, and its relevance to leasing.

What is a Credit Score?

If you’ve never used credit cards or purchased anything via finance, building a good credit score is probably something you’ve never really given much thought to.

In short, your credit score is used by lenders to determine whether you qualify for a loan, credit card or service. This is calculated based on your credit history, which essentially based on how you’ve managed your debts and bills in the past by looking at whether you’ve kept up with the agreed payments or whether payments have been made on time.

The purpose of this is to work out how reliable you are, so that the lender can make a decision on whether you will be able to fulfil the financial agreement.

Car leasing credit checks

As with nearly all forms of money lending, you’ll be subject to car leasing credit checks before your lease is approved.

According to the HSBC website, credit reports, including car leasing focus on three key areas:

  • Your credit agreements such as loans and credit cards, including any held jointly with other people
  • Your history of credit repayment, including missed payments over the last six years
  • Public records, including County Court Judgments and the electoral roll

Personal details such as salary and medical information are not included in leasing credit checks, so will not be taken into account.

Do you need a good credit score in order to lease a car?

This will depend on the individual lender; there’s no official minimum credit score to lease a car. However, a good credit score can certainly help to progress your leasing application more quickly, while a bad credit score may make it difficult to find a leasing company willing to accept your application (unless you lease through an adverse credit leasing company, but the costs are normally higher).

Data from Experian - one of the UK’s biggest credit reference agencies - showed that the average credit score for a car lease in the second quarter of 2020 was 729.

However, even if you’ve never used credit cards or borrowed large sums, if you’ve kept up with payments for other services then it’s likely that you’ve been improving your credit score without realising. If you have a contract, things like your monthly mobile phone bill will help with this.

It should be noted that a low credit score isn’t always as a result of poor financial history. For younger people (although not exclusively), it’s often a case of no credit score rather than a bad one.

With this in mind, if you do find that a poor credit score is preventing you from leasing a car, there are a couple of steps that you can take to try and improve your chances.

Add a guarantor

Probably the easiest step, adding a guarantor - or a co-signer - to your lease agreement offers the lender an extra layer of security. This is normally a family member or partner who will be liable for the lease payments if you fail to make them, although you should try to avoid this becoming the reality in order to preserve your credit, while this can also place increased strain on personal relationships.

Make a down payment (initial payment)

Much like paying an initial deposit, making a larger initial payment is another option that could potentially increase your chances of having your lease application accepted. A significant initial payment will both reduce risk to the lender, whilst also showing you’re serious about honouring the lease agreement.

Improve your debt-to-income ratio

This is less straightforward than the previous steps but can be worth the effort. Your debt-to-income ratio is exactly what the name suggests and refers to the percentage of your monthly income (gross) spent fulfilling your financial obligations, such as bills and debt repayments. By reducing your amount of debt/outgoings elsewhere you’ll free up funds that could be put towards your monthly lease payment instead, which may help to satisfy your lease provider that you’ll be able to keep up with your agreed payments.

How does car leasing affect your credit score?

This will really depend on whether or not you keep up with your payments. Leasing a car is very much a similar process to paying a monthly phone bill. Prior to confirming your lease, you’ll agree a fixed monthly payment amount and date with the lender, which you’ll be expected to honour for the duration of your lease.

The leasing company or lender will then report to credit reporting agencies such as Experian to let them know whether you are making your payments on time or not.

If you are, your reports will be positive and over time you’ll start to build up a positive credit history which will increase the likelihood of future applications being accepted.

It works the other way too though, so be cautious. If you miss a payment or are overdue by 30 days or more, this can have a negative impact on your credit score which could lead to future applications being rejected.

Taking this into account, it’s important that you always work out what you can afford before you apply for a car lease. While leasing can offer excellent value and benefits, you should still set yourself a budget and then stick to it.

Some leasing providers do offer ‘Free Loss Of Earnings & Life Event Cover’ so if the worst happens, you can return your vehicle, no charge.

Paying up a lease early can also actually hold you back from improving your credit score, as despite seeming like a positive, reducing the overall number of payments due means the leasing company has fewer payments to positively report back on to the credit agencies.

So car leasing can improve my credit score?

Yes! As long as you continue to make your monthly payments on time as agreed, car leasing can improve your credit score, which could help you to secure things like a mortgage in the future.

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