Are you thinking of getting a new car? Then you need to understand the difference between buying a new car and leasing a vehicle, as this would have an impact on your monthly budget and your credit score. Here we have listed out the impact on credit scores for leasing vs financing a car.

• Leasing
  • Boost your credit score
    Leasing a car could help you boost or rebuild your credit score as the payments you make for the lease are reported similar to that of auto loan payments. When you lease a vehicle, you need to pay monthly charges for about 24-48 months. Although most auto dealers or manufacturers are not required to report these payments to the major credit bureaus, most do. Hence, if you make regular on-time payments every month and it shows up on your credit report, you should be able to boost your credit score with time. However, if you miss a payment, it would have a negative impact on your credit score. It should be noted that monthly lease payments are usually lower than payments for an auto loan.
  • Low interest rates
    Like an auto loan, if you have a high credit score, you could qualify for lower interest rates. This could be an advantage for you. So check your credit score before deciding on leasing or financing.
  • Drop in credit score
    There could be a short-term drop in your credit score when you open a new lease account or apply for a lease. However, this is short-term, and as mentioned above, over time, your credit score could improve.
  • Paying off the lease early
    Another point to remember is that paying off your lease early could also negatively impact your credit score. This is due to the penalty charges and other fees involved. However, a few car lease agreements allow someone else to take over the lease for you. This would depend on your contract.
• Financing
  • Hard inquiry
    When you apply for an auto loan, a hard inquiry is added to your credit report which could impact your credit score. However, similar to leasing, this is short-term, and with regular on-time payments, you can boost your score.
  • Type of account
    An auto loan is reported as an installment account on your credit report. Other types of accounts in this category are mortgage and student loans. If you don’t have an installment loan, an auto loan may help your credit profile as your credit score is based on your credit mix, which is about 10% of your FICO score.
  • On-time payments
    Regular on-time payments will be reflected as “current” or “paid as agreed” on your credit report. This can help to boost your credit score. However, if you are more than 30 days late with payments, your car could get repossessed, and you could ruin your credit score.

Now that you know the impact on credits scores for leasing vs financing a vehicle you can decide based on what best suits your financial condition.