Credit Scores and Car Leasing: What You Need to Know
You've chosen the car you want for your next lease agreement. The proposed monthly payments look good, even the initial payment looks reasonable. But now comes the potentially tricky part – your credit score. This is an essential part of the application process to assess your financial reliability. But, by understanding what's involved, it shouldn't be tricky.
In most situations, customers are required to have a 'good' or an 'excellent' credit score in order to complete the leasing agreement. There's no single, universal minimum score, though, with leasing companies taking a 'good' or 'excellent' score as a starting point, with approval being based on other factors including affordability and personal circumstances.
Understanding credit scores in the UK
Leasing companies will use well-known names in the credit referencing business, such as Experian, Equifax, and TransUnion.
Experian, for example, scores between 0 and 999, with a 'good' score being anywhere between 881 and 960, and 'excellent' between 961 and 999. Equifax has 0-1000 scoring band, with 'good' being between 531 and 670, 'very good' between 671 and 810, with 811 to 1000 reserved for 'excellent'. TransUnion has a smaller scale of between 0 and 710, with 'excellent' between 628 and 710, and 'good' between 604 and 627.
These firms will each use their own internal scorecard, based on their individual systems. These scores consider things such as, first and foremost, your identity and payment history, along with affordability and other current finance agreements, but also payment history and County Court Judgements (CCJs). Therefore, a 'good' score with one firm is a strong indicator of approval, but not a guarantee.
The car leasing credit check process
To proceed with your leasing agreement, the application process will involve a credit check. But why is it necessary, what actually takes place, and what are lenders looking for? Here we explain exactly that.
Why is a credit check necessary?
It's simple – to analyse if you are financially reliable and suitable for the leasing agreement. Before you enter the contract, the lender needs to know whether you’ll be able to make the monthly payments on time.
Soft checks vs. Hard checks
A soft check is exactly what it means – it's not in-depth. A company will look at certain information on your report, but won't burrow further down into the details and perform a full examination. A hard check is the opposite, and is carried out when you're applying for credit such as car finance. Here, the lender will be looking at information such as your borrowing and payment history. Importantly, a hard search will be listed on your report, meaning other lenders can see this. Your credit score will also fall slightly to reflect this, but this is normal and it should recover over time.
What else do lenders consider?
Proof of identity
This is an essential part of the check, for obvious reasons. Lenders will ask for ID, usually your driving licence or passport, in order to confirm your identity. This to make sure that you're not committing identity fraud, such as taking out credit while pretending to be another person.
Personal details
Car leasing agreements need your personal details, so that's your full name (and any former names), date of birth, marital and residency status, plus a three-year address history. For your address, it's important to check that it's correct and that you're on the electoral register . The checks might also ask for proof of address from recent utility bills or bank statements.
Employment and income
Bank statements aren't just used to sometimes check your proof of address, but more often they're important to check your income. This is to find out if you can make the payments and make them on time. Your employment history might also be asked for, along with payslips to prove your salary. If you're self-employed, you might have to provide a number of years' worth of proof of income.
Credit report
To calculate your credit score, lenders will look at a range of information such as your credit report and other applications in the past. The type of data they will glean from this is your repayment habits, and any bankruptcy or County Court Judgements (CCJs), previous credit applications, and other financial agreements you might already have.
Options for those with poor or no credit history
Here we’re mostly focussing on people with 'good' and 'excellent' credit history, but you might not fall into those categories. Does that mean you won't be able to take out a leasing agreement?
The simple answer is no, you can still lease a car with bad credit. There are some ways to get that dream car with a lease agreement even with a bad or poor credit rating.
The first is paying more upfront as this will lower the monthly payments, and, in turn, lower the risk for the lender.
Secondly, you can find a lender that specialises in accepting customers with a poorer rating, and thirdly, get a guarantor or co-signer to act on your behalf.
And lastly, you could revise your ambitions and choose a more affordable car. Lenders are more likely to accept customers with bad credits on cheaper, lower-priced cars as there's a higher chance the customer won't be overstretching themselves every month.
How to improve your credit score before applying
There are some essential ways to improve your credit score. Firstly, check your credit report for errors and correct them – this can easily be overlooked but is a very effective way of bumping up your score. Other methods include registering on the electoral register to verify your address, always paying bills on time, reducing debt, and if you have little or no history, building credit with a small card or loan and repaying it quickly.
Conclusion
While a 'good' or 'excellent' credit score is required by most credit lenders, all applicants' situations are considered and there are many potential routes and outcomes. With a bit of understanding, that leasing deal on your dream car could be a few clicks away.
For more information and for personalised advice on your circumstances, AA Lease is here to help. Contact us today.