Is Leasing or Buying a Car Better for Your Credit?

leasing or buying a car is better for your credit

You need a new car, but you either don’t have the cash or need something better than a clunker. At the same time, you might also be working on your credit repair. With competitive leasing options available these days, you may be wondering if you’re better off going that route or financing your car with a traditional auto loan.

Keep reading to find out how to finance your next vehicle while simultaneously fixing your credit.

Both Monthly Payments Count as Debt

If you’re looking to lower your credit utilization, it doesn’t make a difference if you choose to lease or buy your next car. They’ll both count as debt on your credit report, with either balance showing up. If you ever need other types of loans, lease and loan payments also count toward your monthly debt-to-income ratio, which can result in higher interest payments or even not getting approved.

However, when you purchase a car, your entire financed amount shows up on your credit report. If your loan is for $25,000, that is the amount of debt reported to the credit bureaus. With a leased car, on the other hand, the residual value of the vehicle after your lease term doesn’t show up. Say that same $25,000 vehicle will be worth $15,000 after your three-year lease. In that instance, only $10,000 shows up as your borrowed amount on your credit report. In that sense, it could help you with your credit repair journey.

Leasing May Result in Fewer Inquiries and Improved Credit

Another factor to consider is how inquiries are handled during the leasing and car loan application process. Lease financing generally goes directly through the dealer, so only one inquiry shows up on your credit report. If you apply for an auto loan through a car dealership, on the other hand, your loan request may be sent to multiple lenders.

If you’re doing all of your car shopping within a couple of weeks, all of those inquiries may just be counted as one, since you’re clearly just rate shopping. However, if you need to take longer with your car shopping, you could end up unraveling some of your credit repair success with multiple inquiries spread out over time. Even after you’ve applied for a car loan, it’s smart to check your report for any potential credit errors from the application process.

Your Lease May Show Up as Completed Contract

Depending on how long you plan on spreading out your car loan, a shorter lease may help boost your credit score significantly when you’ve successfully completed payments. A finished contract on your report is a strong asset to have, and leases generally come with shorter repayment periods. If you’re comparing a 36-month lease to a 60-month car loan, for example, you’ll reach that stage of completion a full two years before your car payments are finished.

Lease Maintenance May Be Covered

With a lease, you may be able to spend less on maintenance and covered repairs. Check your contract to see what’s included in your coverage. How does this help fix your credit? The less you spend on these unexpected expenses, the more you can put toward debt or emergency savings. You can also use that extra cash to avoid having to borrow money or charge up credit cards in the future.

Both of these things help protect your credit in the future. While you definitely want to proactively work on your credit repair, you should also have a plan to create a safety net to avoid future financial pitfalls as much as possible.

Buying vs. Leasing: Bottom Line

While many of these credit-related issues tend to favor a lease over a car loan, there are lots of other factors to consider. These include things like affordability, whether or not you need a down payment and costs at the end of your lease contract. A lease may be more expensive on a monthly basis if you choose a shorter term. You can lower that amount by making a down payment, but that’s not always the best choice, especially if you don’t plan on buying the car at the end of your lease. If you drive a lot, you may also have to pay extra if you go over your allotted mileage during your lease.

Consider your options holistically to get the best deal both from a financial and a credit perspective. Also, think about both choices from both a short-term and long-term point of view.

Looking for other ways to improve your credit? Sign up for a free consultation with Ovation Credit. We can help you efficiently navigate credit disputes to improve your credit report.

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