Can You Lease A Car With Bad Credit?
You’ll be pleased to know that you can still lease a car with bad or no credit, it’s just likely you’d be asked for a higher initial rental or face higher interest rates. But how does credit affect leasing? Read on to find out more.
What credit rating is required to lease a car?
Typically, leasing providers look for credit scores of good to excellent when it comes to reviewing applications, which can make leasing a car difficult if you don’t have at least a good rating.
That said, acceptance criteria varies from provider to provider and an application’s decision is not based solely on credit rating. For example, some may accept individuals with lower credit rating if they can prove that they can afford to pay the monthly payments and the initial payment/deposit and others may limit the pool of options available by removing more premium manufacturers.
If you have a lower credit rating and want to improve your score, read on for possible ways to increase your credit score and help you obtain a good credit rating.
Can I lease with bad credit?
Leasing providers mainly use Experian credit scores in order to determine your credit rating, with Equifax used by a minority, and the majority of providers will be looking for ratings of good to excellent in order to approve finance. As such, it’s advised that you check your score online before beginning the application process. That said, a joint application or using a guarantor may be ways to obtain a lease with bad credit.
What is a joint application?
Some finance providers allow you to apply for a joint application with a family member or spouse, where both of the individual’s details are used to support a lease application. In a joint application, both individual incomes are combined and, if approved, both applicants must split the monthly payments. In order to qualify for a joint application, both applicants must live at the same address.
Remember: in a joint application credit scores of both parties could be negatively affected by missed or late payments.
What is a guarantor?
Again, some finance providers allow you to apply for finance with a guarantor who becomes responsible for paying the finance should you fail to make payments. Usually a guarantor will need to be a family member and have a strong personal credit history.
Remember: when dealing with finance with a guarantor, the credit scores of both parties could be negatively affected by missed or late payments.
Will leasing a car improve my credit score?
Any finance repayment affects your credit score and leasing is no different. By taking out a lease deal and successfully paying your monthly payments, you are proving that you are creditworthy and your credit score will increase.
The rate and speed at which your credit score improves depends on the nature of the deal and its contract length, since the more money you finance the greater the impact will be. As such, if you are looking to improve your score faster you may wish to choose a short term length as the monthly payments are higher.
Remember: not keeping up to date with your payments will have the opposite effect and any missed or late payments will lower your credit score.
What is credit?
Credit is the longstanding act of trust which allows a creditor to provide resources to a borrower who will pay them back at a later date. In the modern day, credit refers to any form of deferred payment and can be for finance or goods and services.
Financial organisations assess an individual’s creditworthiness with credit scores that assess the individual’s total credit history. The outcome of your credit score determines whether you have a good or bad credit rating, which is used to work out how much of a potential risk you are to the provider i.e. how likely you are to pay back the creditor.
While good credit rating entitles you to the majority of financial agreements, bad credit can deem you too much of a liability and lead you to being declined. As such, it is important to be aware of your credit rating and what you can do to maintain it.
Understanding your credit score
In the UK there isn’t just one credit rating agency, there are three – Experian, Equifax and Transunion – and Experian and Equifax are used by leasing providers to assess your credit score. While the agencies keep their calculations secret, they generally look at your credit history and related information to assess risk by using your past actions to determine your future acts. With all agencies however, the higher the rating the better your standing. A breakdown for Experian and Equifax can be seen below.
Experian use a rating out of 999 and require a score of 881 or over to be deemed as having “good” credit.
Equifax use a rating out of 700 and require a score of 420 or over to be deemed as having “good” credit.
6 ways to improve your credit score
While your past does affect your future, it is important to remember that you can influence your credit score and improve it over time. Here are six simple ways to help positively influence your credit score.
1. Make sure you’re on the electoral roll
Perhaps the most important aspect of credit is verifying identity and the easiest way to verify your identity is by being on the electoral roll. If you’re not on the electoral roll it is harder to identify you as an individual and if you can’t be identified, you can’t be assessed and as such are more likely to be declined.
2. Read your file
As mentioned, your credit history plays a pivotal role in your credit score and as such it is important to make sure your history is in fact your history.
Go through your credit file for each agency and check to make sure everything is correct and valid. We are all human after all and, although rare, mistakes happen and these mistakes could be negatively impacting your rating. Make sure you check your file before you make any financial decisions to ensure you are in the best possible standing.
3. Limit applications
Everytime you make a financial application it is added and stored in your credit file, regardless of whether you were accepted or rejected. While the status of your application is not stored, i.e. it will not say whether your application was successful, numerous applications can give the wrong impression.
For example, multiple applications for the same service in a short period of time can suggest numerous rejections which doesn’t give the right impression to lenders. As such, it is recommended that you keep applications to a minimum to avoid damaging your file.
4. Check for fraud
If your details have been added to the national fraud database which is run by National Hunter, you will find it incredibly difficult to get credit regardless of how good your rating may actually be. With identity theft on the rise, it is worth checking you’ve not been a victim of fraud to grant peace of mind at the very least.
If you believe you have been a victim of identity theft, contact the relevant authorities immediately. Make sure to notify your bank etc. of any unusual transactions, check your credit file and report all lost or stolen documentation e.g. passport and credit cards.
5. Manage your credit utilisation rate
Credit utilisation can be a factor that goes into the calculation of credit ratings and relates to the amount of credit you are currently using out of your total offering. It is believed a lower utilisation rate can help improve your credit score as it is more indicative of better financial standing than a higher rate.
You can work out your utilisation rate by calculating the percentage of how much of your credit you are using out of your total offering. For example, if you are currently using £1000 of credit out of a possible £10,000 total, you are utilising 10% of your available content. It is believed there is no threshold for credit score improvement with the lower rather the better the results, but experts suggest a utilisation rate of 30% of better.
If you’re struggling to lower your credit utilisation rate by paying off balances in full each month, you can increase your utilisation by keeping accounts open that you don’t intend to use, by requesting higher credit limits or by opening additional accounts (although this can potentially negatively affect your rating in the short term).
6. Build credit with a credit card
Building credit via consistently paying bills on time is a tried and tested way of improving your score, especially for young people with no credit history at all. By occasionally paying for items with a credit card rather than a debit card and ensuring you pay out in full on time, will increase your rating over time.
4 ways to avoid a bad credit score
There are numerous factors that can negatively impact your credit score and in order to fully understand your score and how to improve it, it’s worth taking a look at things you should avoid.
1. Avoid late payments
Missing payments is one of the most common ways of negatively impacting your credit score, since reports done by credit agencies, such as Experian, put a lot of emphasis on payment history. As such having even one late or missed payment on record can significantly affect your score.
2. High credit utilisation
Similar to how low credit utilisation can increase your score, a high utilisation can lower it. If you’re consistently maxing out cards and utilising all the credit at your disposal, it can suggest that you’re dependent on credit i.e. you can’t manage day to day without financial support.
3. Negative account information
Account intervention in the forms of bankruptcy, foreclosure, repossession and charge offs will all severely impact your credit rating and for longer. As such, always make sure to budget for what you can afford, stay on top of payments and at the first signs of struggle seek help.
4. County Court Judgements
If you fail to repay money that you owe in time, a county court judgement, or CCJ, may be registered against you. A CCJ is a last resort companies take to regain their money and If you don’t repay the claim in time, usually within a month, the CCJ will stay on your credit file for the next six years. Having a CCJ on file is a red flag to creditors and even a satisfied i.e. paid CCJ, is viewed negatively.
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