Nationwide Vehicle Contracts explain how leasing a car can effect your credit score
If you're thinking of leasing a car for the first time, chances are you'll have some queries about how vehicle finance may affect your credit history.
To help explain how leasing works, Nationwide Vehicle Contracts has put together an informative blog with everything you need to know about applying for vehicle finance and how your credit score may be impacted.
What is a credit score?
A credit score is a three-digit number that shows how likely you are to be accepted for any potential credit. This score is based on your financial history, such as your ability to make payments on time and the amount of debt you currently have.
The purpose of a credit score is to work out how reliable you are and to evaluate any potential risk to lenders. Typically, the higher your credit score, means the more likely you are to be accepted for a credit request. This is because most lenders tend to prefer lending to established borrowers who they can better assess the risk for paying back debt.
Do you need a good credit score in order to lease a car?
As every lender assesses risk differently, there's no official minimum credit score to lease a car. Most finance providers require a good to excellent credit score in order to lease a car., Those with a bad credit score may find it tricky to find a leasing company willing to accept your application. Having a bad credit score can also increase your monthly payments because you're a higher risk to the lender.
One of the UK's biggest credit reporting agencies, Experian, says scoring 881 - 960 is usually considered good, whilst a score of 961 – 999 on the same range is considered to be excellent. Using Experian's scoring system, you typically need to have a credit score of around 881 or more to lease a car. However, it's important to know that every finance provider uses a different scoring system based on their risk appetite, so while one lender may refuse your application, it may be accepted by another.
How does car leasing affect my credit score?
Like any credit agreement, such as applying for a credit card or mobile phone contract, leasing a car requires a credit check, which in turn has an impact on your credit score. But don't let that put you off of leasing. In fact, as you demonstrate you can make the payments on time every month, leasing can help your credit score by proving you're a responsible consumer. Paying your monthly fees promptly reflects well on you and your credit score, meaning you may be more likely to get better deals on mortgages, car insurance, and credit cards in the future.
Can I lease if I have a bad credit score?
If you have a low credit score, trying to get approved for vehicle finance can be difficult. If you have been declined finance in the past, have been declared bankrupt, have a County Court Judgement (CCJ), or have entered into an Individual Voluntary Arrangement (IVA), you are unlikely to be accepted for vehicle finance. If this is the case, car leasing may not be the best option for you at this moment. For more information, check out our Leasing a Car with Bad Credit guide.
It’s worth noting that having a low credit score doesn't always imply a bad financial history. Sometimes it's due to having little to no credit history, which is the case for many young drivers as they've never had a credit agreement before. This can lower your chances of being accepted as lenders prefer lending to established borrowers who they can better calculate the risk for paying back debt.
If you do have a low credit score, it isn't the end of the world, as there are methods to improve your score over time. The Money Advice Service, Money Saving Expert, and Experian have expert advice and tips for building a positive credit history.
Ensuring your bills are paid on time, keeping balances low on credit cards and paying off any outstanding debts are all simple things you can do to improve your credit score.
Can I check my finance eligibility before applying for a car lease?
If you're skeptical if you're eligible for vehicle finance, you can use our free finance eligibility tool to see if you're likely to be accepted. Also if you visit Experian's website you can find out your current credit score.
Currently, our panel of finance providers don't offer a 'soft search' facility. This is where you can check and see if you're expected to be accepted or not without affecting your credit record. However, Nationwide Vehicle Contracts will run through an eligibility questionnaire with you over the phone before proposing you for finance to ensure you fit the criteria and aren't assessed unnecessarily.
Will my credit score be affected if I'm accepted or refused?
Accepted vehicle finance: Once you've been accepted for vehicle finance, you can help improve your credit score by sticking to your agreement and paying your monthly rentals on time every month. This shows the finance company that you can manage your money by making payments on time, and you can be trusted to borrow substantial amounts of money and handle the repayments. This will then help with any future credit agreements you may require, for example, credit cards, mortgages, loans or future car financing.
Refused vehicle finance: If a lender has refused your credit application, this may have a negative impact on your credit score. This is because once you apply for credit, an inquiry is added to your credit report. This indicates that you've applied to take on new debt and that potential new debt represents a possible risk that negatively impacts credit scores. Hence, you must ensure car leasing is the right option for you financially before applying for vehicle finance.
What happens if my circumstances change during the lease contract?
If your financial circumstances change during the term of your lease contract and you struggle to make the payments, you must speak to your finance provider as soon as possible to discuss the options available to you. In some cases, early termination may be the best option for you, or you may choose to transfer the contract over to another person who will be able to take over the outstanding rentals.
To prevent a negative impression on your credit score, it is important you seek advice on the options available before making a decision. It is vital for you to do your research, plan accordingly, and budget for all possibilities to make sure car leasing is the right funding option for you.
Can I use a guarantor on a car lease?
Depending on the finance provider, you may be able to add a guarantor to your lease contract. Adding a guarantor means that if at any point you fail to pay the agreed payments, the guarantor will be liable and will take over the monthly rentals for the remainder of the contract term.
Adding a guarantor to your contact is a big responsibility and typically falls typically to a parent or family member. To be a guarantor, you must be 21 or older, have a strong credit rating and not be financially linked to the other party.
How can I find out more about car leasing?
Still unsure if vehicle leasing is right for you? Find out more about How Leasing Works in our helpful guides section. If you’d like to speak to someone about finance eligibility, call Nationwide Vehicle Contracts on 0345 811 9595. One of our friendly team will be happy to answer any questions you may have.
