Do I need a good credit rating to lease a car?

We get asked all the time: do I need a good credit rating to lease a car?

In short, the answer is yes, but there is a lot to consider and options available if you don't have a good credit score.

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• Why do I need to go through a credit check to lease a car?

• How does the credit check work?

• What is considered a good credit score?

• What if my score is considered poor?

• What happens if my application is declined?

• How can I improve my score?

• What if I do not have any credit?

• What could prevent an approval?

Why do I need to go through a credit check to lease a car?

When you lease a car, you're essentially entering into a financial agreement with a leasing company. This agreement involves making monthly rentals over a set period to use the vehicle. A credit check is required by leasing companies to assess your financial reliability and ability to make these payments consistently and on time.

Here's why a credit check is necessary:

• Financial Responsibility: Leasing companies need to ensure that you have a track record of managing your finances responsibly. Your credit history and credit score provide insights into how you've handled credit and debts in the past.

• Risk Assessment: By reviewing your credit report, leasing companies can evaluate the level of risk associated with leasing to you. A good credit history suggests that you're likely to make payments as agreed, whereas a poor credit history may indicate a higher risk of defaulting on payments.

• Protecting Lenders: Leasing companies have a responsibility to protect their own interests. Conducting a credit check helps them identify any potential financial risks upfront, allowing them to make informed decisions about whether to approve your lease application.

Overall, the credit check is a standard practice in the leasing industry to ensure that both parties involved - the lessee and the leasing company - can enter into a lease agreement with confidence, knowing that the financial obligations are likely to be met throughout the lease term.

Most leasing companies use credit referencing agencies, like Experian, to obtain information on your credit score. If you are unsure of your credit score, you can get a free credit check score on their website (which you can view here).

How does the credit check work?

The credit check process is relatively straightforward:

• Application Submission: When you apply to lease a car, you provide personal and financial information to the leasing company, such as your name, address, employment details, and income. You can read more on this stage here.

• Credit Check: The leasing company then conducts a credit check by contacting one or more credit reference agencies in the UK, such as Equifax, Experian, or TransUnion. These agencies hold your credit file, which contains information about your credit history, including loans, credit cards, mortgages, and any missed payments or defaults.

• Credit Report Review: The leasing company reviews the information provided by the credit reference agencies to assess your creditworthiness. They look at factors such as your credit score, payment history, outstanding debts, and any public records (such as County Court Judgments or bankruptcies).

• Decision Making: Based on the information gathered from the credit check and other factors (such as affordability checks), the leasing company decides whether to approve your lease application. If you have a good credit history and meet their criteria, you're more likely to be approved for the lease.

• Chrunch time: Once the credit check is complete and a decision is made, the leasing company informs you of the outcome of your lease application.

It's important to note that the credit check is usually a hard check, which may affect your credit score temporarily.

What is considered a good credit score?

In the UK, credit scores typically range from 0 to 999, depending on the credit reference agency (CRA) providing the score. While the exact scoring criteria may vary slightly between different agencies, like Experian and Clearscore, a higher credit score generally indicates better creditworthiness.

Here's a breakdown of what is considered a good credit score:

• Excellent: A credit score typically above 881 or 961 (depending on the CRA) is considered excellent. Individuals with excellent credit scores are likely to have a strong credit history, with a demonstrated track record of managing credit responsibly. They're usually eligible for the best interest rates and terms on financial products, including leases.

• Good: A credit score ranging from around 721 to 880 (Equifax) or 881 to 960 (Experian) is considered good. This indicates a solid credit history, with few missed payments and responsible management of credit accounts. People with good credit scores should still be able to access competitive lease deals.

• Fair: Credit scores falling between approximately 561 to 720 (Equifax) or 721 to 880 (Experian) are considered fair. While individuals with fair credit may have some negative marks on their credit history, they may still be eligible for leasing, though they might face higher rates due to the lack of available leasing companies.

• Poor: A credit score below around 561 (Equifax) or 720 (Experian) is considered poor. This suggests significant credit issues, such as missed payments, defaults, or County Court Judgments (CCJs). People with poor credit may find it challenging to secure a lease.

It's essential to note that each leasing company may have its own criteria for assessing creditworthiness, so what constitutes a "good" credit score may vary slightly depending on the specific leasing provider. However, as a general guideline, aiming for a credit score in the "good" to "excellent" range will increase your chances of qualifying for favourable lease terms and deals.

What if my score is considered as poor?

If your credit score is considered poor, there might still be avenues available for leasing a car. You can explore subprime leasing companies that specialise in accommodating individuals with lower credit scores or consider finding a guarantor. That said, not all leasing companies will consider this, so it's always best to speak to us if you've got a specific offer or vehicle in mind.

In addition to this, some leasing companies will allow your spouse to lease the car on your behalf.

What happens if my application is declined?

If your application is declined, there are several steps you can take.

Firstly, it's key to understand the reason for the rejection. You can request this information from the leasing company to see what you may need to improve. Once you know the reasons why, you can start taking proactive steps to improve your credit score, such as addressing any outstanding debts or providing additional documentation to support your application.

Additionally, you may want to consider another leasing company, one that is more lenient. Or, failing that, you could look to work with financial advisors to develop a plan for improving your creditworthiness over time, increasing your chances of approval for future lease applications.

How can I improve my score?

• Check and Correct Errors: Start by checking your credit report for any errors or discrepancies. Correcting these inaccuracies can give your score an immediate boost and even turn a decline into an approval.

• Electrol role: Make sure you are on the electoral role as this can have a massive impact on your application.

• Make Timely Payments: Focus on making all of your payments on time, as late or missed payments can negatively impact your score.

• Reduce Credit Card Balances: Aim to reduce your credit card balances and avoid maxing out your cards.

• Keep Older Accounts Open: Consider keeping older accounts open, as a longer credit history can positively influence your score.

• Limit New Credit Applications: Be cautious about applying for new credit too frequently, as multiple 'hard' checks can temporarily lower your score.

What if I do not have any credit?

Usually, you won't need to worry about this. No credit = no bad credit, too. So, providing the lease company can track you at your address and you can prove affordability, you should be fine.

That said, there are several steps you can take to start building credit:

• Apply for a Credit Card: By obtaining a credit card and using it responsibly (i.e. making timely payments, keeping the balance low, etc) you can start building a positive credit history.

• Electoral Role: Get yourself into the electoral role and that can immediately improve your score. This seems to be missed a lot!

• Apply for Smaller Credit: If you haven't already, consider getting a mobile phone contract or something similar, whereby you pay monthly over a period of time.

• Pay Your Bills on Time: While not all bills are reported to the credit bureaus, paying bills such as rent and utilities on time can help establish a positive payment history, which is considered when calculating your credit score.

By taking these steps and demonstrating responsible financial behavior, you can gradually build a positive credit history and establish a credit score.

What could prevent an approval?

Several factors could prevent approval for leasing a car, such as:

• Poor Credit History: A history of late payments, defaults, or bankruptcy can significantly impact your credit score and decrease your chances of approval.

• Insufficient Income: Leasing companies require you to have a stable income to ensure you can afford the monthly lease rentals. If your income is insufficient or unstable, it may prevent approval.

• High Debt-to-Income Ratio: If you already have significant debt obligations compared to your income, leasing companies may consider you 'fully committed', which could lead to a declined application.

• Limited Credit History: If you have a limited credit history or no credit history at all, leasing companies may be hesitant to approve your application due to the lack of information about your creditworthiness.

• Unstable Employment History: Leasing companies may view a history of frequent job changes or unemployment as a risk factor. Some may prefer lessees with stable employment history to ensure consistent income.

• Previous Lease Defaults: If you have a history of defaulting on previous lease agreements, leasing companies may be reluctant to approve your application for a new lease.

• Lack of Required Documentation: If certain documents are requested, failure to provide necessary documentation, such as proof of identity, income, or residency, can delay or prevent approval for leasing a car.

It's essential to address any potential barriers to approval before submitting a lease application. This may involve improving your credit score, stabilising your income, or addressing any outstanding debts.

You can find out more about how to apply here.