Are you thinking about leasing a car and wondering how it might affect your credit score? Leasing a vehicle - or Personal Contract hire - is essentially a long-term rental. This means you sign an agreement to use the car over a certain period, and up to a maximum number of miles. You do not own the car and must return it at the end of the rental agreement.
Potentially improved credit score
By leasing a car and making payments on time, you may improve your overall credit score. If you decide to borrow money in the future (mortgages, credit cards, car insurance and loans), lenders may view you as lower “risk” because you've paid off your previous debts in a timely manner.
But of course, if you miss some repayments, your credit score could be damaged - so it's important to keep on top of your leasing commitments.
Credit checks before you lease
To lease a car in the first place, you'll need a sufficiently good credit score. If your credit score is poor, you may have to pay more interest and make larger repayments compared to if your credit score was good - because you may be viewed as higher risk by lenders.
Lenders check your credit score with one or more consumer credit reporting agencies, such as Equifax or Experian. These organisations collect data on consumers' borrowing history.
If your credit score is low, you may need to pay a big deposit. However, this will reduce your monthly repayments and interest charges.
Poor credit: the guarantor option
A low credit score could make it difficult to lease a car. However, another option is to ask a relative or friend to be a guarantor on your lease. This means they would be legally obliged to make your repayments if you become unable to do so. A guarantor must have a good credit history, be financially stable, and be aged at least 18 (or 21 under some agreements).
Some lenders may view a car lease as a loan - composed of all the due leasing payments.
- Terms are often flexible
- No worries about selling the car later
- Your PCH agreement may cover some costs such as road tax
Leasing: Potential cons
- You may have to pay extra fees if you end the contract early
- You may have to pay extra fees if you damage the car
- There could be extra fees if you want to increase the mileage limit
- In some cases, you may be required to pay three months of the lease up-front