Whether you’re leasing a car for business or personal use, you’ll be required to complete a credit check before being approved for finance, as a credit check is a requirement of the Financial Conduct Authority (FCA) regulations.

If you’re new to leasing credit checks can be a confusing and daunting process. Common questions like: What are they? How do they work? and How long do they take? cross the mind of most leasees, so Moneyshake has taken the liberty of forming this handy guide covering everything you need to know about credit checks when leasing a car.

Credit checks and leasing

A credit check or credit search is when a creditor views information from your credit report. While usually they will make you aware that they will perform a credit check, they aren’t legally required to do so if they have a valid reason for needing to access your report. For example, the act of submitting a lease application gives them the right to perform a credit check without prior consent.

When processing your lease application, a company can either perform a soft or hard credit check and the two differ in terms of usage and impact.

Soft credit checks

When a creditor performs a soft credit check, only some of your information is examined as part of an initial review, rather than examining your full credit history. An example of a soft credit check, is when a creditor is looking to verify your identity as part of an identity check.

The advantage of soft credit checks is that they aren’t logged in your credit history and as such aren’t visible to other companies (although you will still be able to see a record of which companies have performed a soft search on your report). This means that soft credit checks are effectively invisible and as such don’t affect your credit score.

This is incredibly powerful because it allows you to check your initial eligibility to credit before you apply. Moreover, since they don’t affect your credit score, you also aren’t limited in the number of checks you can perform or how frequently you can perform them.

Hard credit checks

Conversely, when a creditor performs a hard credit check, they are examining your full credit history. When you apply for a loan, phone contract, mortgage or credit card a provider will perform a hard credit check to ensure you can afford to make payments.

Unlike soft credit checks, since a creditor is viewing your full credit history, hard credit checks are logged and as such are visible to other companies. This means that hard credit checks can affect your credit score, as too many in a short period of time suggest financial instability and credit dependence.

Typically hard credit checks will stay on your credit report for a year but they can stay on for longer, such as debt collection checks which can last up to six years. To avoid too many hard credit checks on your credit report, only submit applications where you are certain that you are eligible, by using soft credit checks to test your eligibility.

Furthermore, it is advised that you space out applications when possible to avoid having too many hard checks occurring at the same time. No more than one application every three months is recommended.

What will funders look for on my credit report?

Diagram to show what funders look for on credit files

When it comes to assessing your creditworthiness, creditors examine multiple aspects of your credit report in order to determine whether or not you will be able to afford a lease. Generally, creditors will look at the following information:

  • The electoral roll – to see whether or not you’re registered to vote.
  • Public records – to see whether or not you have any court judgments or previous bankruptcies.
  • Account information – to see whether or not you’ve made previous payments on time.
  • Home repossessions – to see whether or not you’ve previously had a home repossessed.
  • Financial associations – to understand who you are financially connected to.
  • Previous searches – to determine how many similar applications you’ve filed in the last 12 months.
  • Linked addresses – to help determine stability.

By understanding and analysing these key areas of your credit report. The creditor can build a picture of your borrowing history and determine the likelihood that you will pay the payments outlined in your lease agreement. For example, not being registered to vote or many previous searches is a red flag that could lead to your lease application being declined.

What credit score do you need to lease a car?

Diagram to show what rates you'll get with certain credit scores

Generally, leasing providers look for credit scores of 700 or over on the FICO scale when it comes to assessing applications. FICO use a rating between 300 and 850 and require a score of 670 or over to be deemed as having “good” credit.

Having a credit score below 700 on the FICO scale, can make getting finance difficult. However, that doesn’t mean it’s impossible. Read our section on how to lease a car with bad or no credit towards the end of this guide for more information.

Credit checks with business leasing

When it comes to business leasing, credit checks can either be easier or harder than personal leasing depending on your business’s credit rating. If your business has an exceptional credit rating and is a well-established company, credit rating alone could be enough for an application to be accepted. However, if you’re a new company or have a lower credit rating then you may need to provide additional information.

As part of a business credit check, you may be asked to provide the following additional information to accompany your credit rating:

  • Bank statements from the past three months that show a positive net worth.
  • The addresses and identification of all directors.
  • An opening balance sheet if it’s available.

Depending on the finance provider, the credit rating of individual directors may be used in order to help determine the outcome of the application. As such, a poor individual credit rating may adversely affect a business’s application. Conversely however, if the business has a bad credit rating but a director has a strong credit rating they may be asked for a director’s personal guarantee (DPG) which means they would be liable for the monthly payments of the business if the business fails to pay.

The business credit check requirements can present an issue for new ventures that don’t have at least three months’ worth of bank statements/audited accounts. In this case, it may be more beneficial to opt for personal leasing if the director has a good to excellent credit score.

How long does a credit check take?

Most lenders use software to instantly perform credit checks as a lease application is submitted and many make an automatic decision based on the outcome of this check. However, in many cases an underwriter will manually review the credit check and make a decision based on their judgment.

It is this judgement that can slow down the process and while it is usually carried out on the same day as the application submission, it can take longer depending on when the application was submitted, how busy the underwriter is and the complexity of the case i.e. if it is not a clear accept or decline.

As such, most funders will respond to a credit application within two working days, depending on the time of year, while busier periods can mean a wait of five working days. We recommend that applicants contact their provider if they haven’t had a response to their lease application by this point.

Why does providers perform credit checks?

Typically finance providers run credit checks in order to assess an applicant’s creditworthiness through a hard credit check. This creditworthiness is used to determine how likely it is that an applicant will keep to and make their scheduled monthly payments as agreed in their lease agreement. If a finance provider feels like the applicant will not be able to make their payments based on their existing credit history, it is likely that their lease application will be declined.

Alternatively some providers use a credit check simply as a means to verify an applicant’s identity through a soft credit check. These providers do not use credit checks as a means of assessing affordability and will not use the results of a credit check to either approve or decline an application. Instead they usually ask for bank statements or similar in order to justify whether or not an applicant can afford the lease.

Car leasing with bad or no credit

In order to lease a car, most leasing providers will require you to have a good to excellent credit rating. So, if you have bad or no credit, it’s worth considering other options, such as buying a car. Unlike with car finance, paying cash for your car won’t require you to have a credit check.

What happens if you're declined finance?

If you’re declined finance it can be frustrating and at times confusing. Rather than jumping into the next application and trying again, it’s best to take the time to understand what went wrong and how you can improve your next application. Furthermore, as mentioned above multiple applications in a short time window can negatively affect your credit score and you may be better off waiting.

You could be declined finance for a number of reasons, including:

  • Poor credit rating
  • Limited or non-existent credit history
  • Employment history
  • Not being registered to vote
  • Mistakes on your application
  • Lender specific requirements
  • Too much existing debt
  • Too many outlying credit applications
  • Evidence of payday loans
  • Prior bankruptcy
  • County Court Judgements (CCJs)
  • Identity theft

If you can’t pinpoint the reason why you think you were declined finance, you may be able to ask the lender why they turned you down. While they may not go into detail as to why you were declined, they may be able to tell you if your credit report was a contributing factor and they may be able to tell you which agency they used to obtain your report.

If your provider does tell you the agency they used, the next step would be to obtain a copy of your report from that agency and to check for discrepancies and signs of error. Address any errors you find with an explanation and supporting evidence if possible. If you notice signs of identity theft, inform your bank of any suspicious activity, report any and all stolen documents and contact CIFAS the UK’s Fraud Prevention Service.

Only consider making another application once the original issue has been addressed and resolved and you’re certain it won’t affect your credit rating. If you were declined finance because of a poor credit score, invest time in trying to improve your score by following the methods outlined in our guide on leasing a car with bad credit.

Considering leasing your next car? Find out if it’s right for you with Moneyshake lease deals. Compare prices and find your ideal vehicle, without affecting your credit score.

To learn more about the vehicle finances, visit our handy guide page.