Do you need a certain credit score to rent a car?
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Before you can get approval to rent a car, the dealership will check your credit score. According to Experian, the average credit score of consumers who rented a car in the second quarter of 2020 was 729.
While you can still get approval with a lower score, you might be subject to higher interest rates. To learn more about the credit score needed to rent a car, as well as how you can improve your credit to meet the requirements, let’s answer the following questions:
What is a car rental?
A car lease is a type of installment loan. When you rent a car, you are essentially renting the car for a monthly fee for the duration of the lease. At the end of the term, you can either buy the car for the calculated buy-back price or return it.
When you buy a car instead of leasing it, you own the full value of the car. Whether you pay cash or apply for a loan, once you pay it off, you own the car. The car you paid for is an asset in your name. You can continue to drive it without payment or sell it.
At the end of a lease, on the other hand, you only have several years of payments made. You will have the option of purchasing the car or exchanging it for a new model under a new rental agreement.
You can also have a improved credit score if you’ve always made your car rental payments on time. That’s right, a car rental can help you boost your credit score because lenders typically report rental payments to major credit bureaus (TransUnion, Experian, and Equifax).
Do you need a certain credit score to rent a car?
If your credit score is 740 or higher, your score is considered very good by most lenders. They will probably offer you a lease with their best rates.
According to LeaseGuide.com, a score between 680 and 739 is considered prime and will be approved. Scores from 620 to 679 are “almost the best” scores. People with these scores will likely be approved, but could incur a higher interest rate.
Scores below 619 classify you as a “subprime” borrower. You will have to pay a much higher rate if you are approved at all.
Do you have to rent a car at all?
Before signing on the dotted line, make sure that a lease matches your financial situation.
Buying a new car every few years doesn’t make financial sense. The greatest loss in value occurs when you drive the car off the lot.
Unlike a house, which generally appreciates in value over time, a car only decreases in value. This is why a car is considered a depreciable asset. However, if you were to buy a slightly used car instead of a new one, you don’t have to worry about significant depreciation.
If you like to get a new car every two or three years, it’s often better to lease a car than buy one. Leasing puts this loss of value on the leasing company rather than your personal balance sheet.
That said, you may need to pay certain rental fees and adhere to mileage restrictions (on a rental agreement, you usually have to agree to not drive more than one certain mileage each year).
Additionally, the credit score needed to lease a car may be higher than that required to borrow and purchase a car loan. According to Experian, while car rental customers in Q2 2020 had an average credit score of 729, car buyers who borrowed a loan to finance the vehicle had an average credit score of 657.
How to improve your credit before applying?
Whether you’re looking to buy with a loan or lease a car, a higher credit score will give you better terms. You can take the car home with a lower down payment and pay a lower interest rate.
Here are some steps you can take to improve your credit to improve your rental conditions:
- Make payments on time. The most important factor in calculating your credit score is your payment history. Make sure you always make at least the minimum payment on time for all of your monthly bills.
- Pay off credit cards. Your credit utilization rate, also known as the credit utilization rate, is another important factor in determining your credit score. Paying off credit card balances is one of the fastest ways to improve your credit score. Try to keep your credit utilization rate below 30%.
- Carry a mixture of credit. It is generally better to have a mix of different types of credit rather than just one. That said, don’t open a bunch of credit cards or take out loans that you don’t need just to diversify your credit.
- Keep your accounts open, unless they cost you dearly. Accounts that have a long history of on-time repayment will be more valuable than newer ones, so keep your old accounts open unless there is a compelling reason to close them, such as a large annual fee.
- Avoid applying for new loans. It’s a bit of a Catch-22. You have to apply for new credit to get a lease or car loan, but applying for new credit lowers your score. Limit your requests only when you need the credit card or loan. Do not apply for all the offers that come up.
Improving your credit score is a slow process, but it is something you can do. My credit score has increased by over 115 points since I started tracking it, but it took me years to build the 830 credit score that I have today. Always think long term when dealing with your credit.
Don’t know what your credit rating is? here is five ways to check your credit score free.
What research do you need before renting?
In addition to checking your credit score, there are other steps you can take before renting a car to make sure you get the best deal.
- Find the car that interests you. Compare offers online to find out what is right and what is not. You can also be flexible with the car you are looking for, as the prices of different vehicles can vary widely.
- Throw in a large net. By shopping at several dealers in your area, you can find a lease with your best terms and take advantage of any special sales or discount offers.
- Try to negotiate. It’s worth asking if the dealership can cut costs or increase your annual mileage. Just as dealerships negotiate car purchases, they usually have the power to negotiate car rental contracts as well.
- Don’t make your down payment too big. While a larger down payment can lower your monthly payment, you don’t want to invest too much money in the vehicle if you don’t plan to purchase it at the end of your term.
While shopping around and negotiating can save you money on a lease, improving your credit score is still one of the most important factors in getting an affordable deal.
what your best financial decision when leasing a car?
Having a new car is good. However, following the Joneses – or any neighbor who got a shiny brand new Mercedes-Benz – shouldn’t sway your financial decisions.
Instead, focus on the numbers. If a new car rental agreement is financially suitable for you and you have the right credit rating, nothing can hold you back.
If you are thinking of buying a car rather than leasing it, check out these profitable alternatives to expensive auto loans.
Rebecca Safier contributed to this report.
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