Getting a new car is exciting, but figuring out how to pay for it can be a hassle. One of the big debates is whether you should lease your car or take out an auto loan.
There’s a lot to consider when choosing: Does a car lease build credit like a loan? Will a lease or loan cost more?
Let’s dive into the ins and outs of car leasing to learn how it’s different from financing, how it builds credit, and whether it’s a good fit for you financially.
Both leasing and financing a car can get you into a new vehicle. However, there is one major difference between the two: ownership.
Simply put, you don’t own the car when you enter into a lease. Essentially, you’re renting your car from the dealership for a set period. At the end of your lease, you can either give the car back or purchase it for a predetermined price.
On the other hand, you own the car outright when you finance it. Even if you live in a title-holding state, you’re still the registered owner of a financed car. Title-holding just means that your lender hangs on to your physical car title until the loan is repaid.
If you’re worried about leasing because you want to build credit, you can relax.
A car lease builds credit just like an auto loan.
When you enter a lease, you’re agreeing to a type of installment account. Instead of borrowing money, however, you’re paying rent to a leasing company to drive their car.
Your lender will report your monthly lease payments to credit bureaus. The bureaus then use this information to build your credit report.
Just make sure you’re getting credit for your lease payments. You want to choose a dealer or creditor who reports to at least two of the major credit bureaus—TransUnion, Experian and Equifax.
Leasing a car isn’t better than financing. And financing a car isn’t better than leasing.
In fact, both leasing and buying can be great options to get the car you want at the most affordable price. It all comes down to your unique financial situation, driving habits, and preferences.
Let’s go over the pros and cons of leasing and buying to see if we can clear up which makes sense for you.
An auto lease agreement gives you the keys to a new car, but you’re not the owner. Take a look at how that can be a good thing—and some of the disadvantages.
Car loans also have unique benefits and drawbacks. Let’s see how an auto loan could be a benefit or a disadvantage.
You don't need to buy a car to build credit. Try a loan from Possible.
Choosing between leasing vs. financing comes down to personal preference.
You might want to lease a car if you:
On the other hand, you might want to buy your car outright if you:
Leasing a car can help you build a good credit history.
Even though you’re not paying off a loan, your lease payment history plays a big role in your FICO score. Payment history is the most important factor in your score.
Making on-time payments will help you grow your score over time. Late payments or missing payments, however, will hurt your credit.
Qualifying for a new credit account, whether a lease or loan, isn’t always easy. You may have to meet strict credit requirements, such as a minimum credit score.
Borrowers with an average credit score or lower credit score might not qualify. You may have to get a cosigner or settle for a used car you can buy outright.
Before you sign up for a new car lease or loan, consider building your score using these methods:
Credit cards are one of the easiest ways to build credit. You can simply put everyday purchases on your card and pay them off each month.
The downside of credit cards is how easy it is to use them. You might get sucked into a pattern of overspending and maxing out cards, which can hurt your credit score.
One option built to avoid overspending and build healthy, credit-building habits, is the Possible Card. It's a no deposit, no interest, credit-building card that doesn't require you to have a sterling credit rating.
A small, short-term loan can help you get money for unexpected expenses while building credit. Look for an installment loan instead of predatory payday loans. Installment loans let you pay back the money you borrow over several months rather than a couple of weeks.
For example, you can borrow up to $500 with a Possible loan. You pay it back over time in four scheduled payments. There are no late fees and no credit check, so you can get a loan, even with poor credit.
Is incorrect information on your credit report causing bad credit?
Keeping an eye on your credit score and credit report can help you spot inaccuracies that could hurt your score.
Luckily, you can get a free credit report from each major credit bureau once every 12 months. Go to AnnualCreditReport.com to request your free report.
You might be able to get credit for payments you’re already making, like rent or utilities. Credit-reporting services let you pay a fee in exchange for reporting your non-credit payments to credit bureaus.
You may have to check with your landlord or utility company to make sure they’re willing to use the service. Additionally, check which credit bureaus they service reports to—they may not report to all three major bureaus.
Both leasing a car or buying it with a loan can potentially build credit. The key is to make your monthly payments on time—whether you’re leasing or have a car loan.
This, along with other credit-building strategies, could help you increase your credit score over the life of your lease or loan.