Why leasing involves a credit check
A lease is a contract to pay for the use of a car over a fixed term. Payments are often monthly, but the schedule and any upfront payment vary by provider and product. The funder owns the car and hires it to you, so it is exposed to a bill of many thousands of pounds if the payments stop. It wants some assurance that you can keep up with them.
Personal contract hire is a hire agreement, not a loan. It is generally not regulated consumer credit in the same way as hire purchase or PCP, which is explained in PCH vs PCP. Even so, the process looks much like applying for credit. The funder will ask for your personal details, address history, employment and income, then check them against information held by credit reference agencies.
For a general overview of how the product works, see how car leasing works. This guide focuses on the checks that sit behind the application.
Soft searches and hard searches
There are two broad types of credit search. The difference matters because only one is generally visible to other lenders.
A soft search (sometimes called a quotation search or eligibility check) is recorded on your file but is generally visible only to you. It is not normally used in scoring, so it should not affect your credit score. Soft searches give an indication of whether you are likely to be accepted, but an indication is not a guarantee.
A hard search (a full application search) is recorded on your file and can be seen by other lenders. It happens when a formal application is made, and it generally stays visible for around 12 months, though agencies can differ. Several hard searches in a short period can make a lender wonder why you are seeking so much credit. It is sensible to avoid several formal applications at once.
| Feature | Soft search | Hard search |
|---|---|---|
| Visible to other lenders | Generally no | Yes |
| Visible to you | Yes | Yes |
| Typical purpose | Eligibility or indicative check | Formal application |
| May affect your score | Generally no | Can do, particularly if there are several close together |
| Typical time on file | Not normally relevant to lenders | Around 12 months |
What funders look at
Your credit score is not a single universal number. Each credit reference agency calculates its own, and each funder applies its own rules and often its own internal scoring on top. A funder may accept an applicant that another declines.
The information used usually comes from several sources. These can include the credit file, the application form and, in some cases, other data the funder holds.
- Payment history: whether you have paid loans, cards, mobile contracts and utilities on time, and any missed or late payments.
- Existing credit: the total of your borrowing, your credit limits and how much of them you use.
- Public records: county court judgments, bankruptcies and individual voluntary arrangements. These typically stay on file for six years, but check the exact period with each agency.
- Electoral roll registration: being registered at your current address helps funders confirm who you are.
- Address and stability: how long you have lived at your address and how often you have moved.
- Income and employment: the funder needs to judge whether the payments are affordable for you.
- Previous applications: the number and recency of credit searches on your file.
Affordability checks
Passing a credit score check is not the same as passing an affordability check. Funders have their own commercial reasons to test whether you can sustain the payments. Depending on the type of agreement and who the hirer is, Financial Conduct Authority rules may also shape how that assessment is done. The paperwork or the FCA's website will show which applies.
In practice, a funder may compare your declared income with your regular outgoings and existing credit commitments. It may ask for payslips or bank statements, or use open banking or credit file data to verify what you have said. The method varies by provider.
Illustrative example: two applicants each have take-home pay of £2,800 a month, essential outgoings of £1,500 and the same credit score. Applicant A has £200 a month of existing credit repayments, leaving £1,100. Applicant B has £900 a month of repayments, leaving £400. Against a hypothetical lease payment of £350, A would have £750 left and B just £50. The funder may reasonably decide differently, even though the scores are identical.
Be accurate on the form. Overstating income or leaving out commitments can lead to a decline. It could also cause problems later if the agreement was based on incorrect information.
Business and sole trader applications
Leasing through a limited company is assessed differently. The funder will usually look at the company's credit file, filed accounts and how long it has been trading. A limited company is a separate legal entity, so the company, not its directors, is normally the party liable under the agreement.
Directors may be asked to give a personal guarantee, especially for newer companies. A guarantee makes the director personally liable if the company does not pay. If the company defaults, the funder may pursue the guarantor for what is owed. That can include missed payments and charges under the agreement, and some guarantees also cover the shortfall after the car is returned or sold.
The company stays liable for the balance as well. The guarantor's liability can continue after the car has gone back, until the amount owed is settled. Terms vary by provider, so read the guarantee before signing it. Enforcement can also damage the guarantor's own credit file.
Sole traders are assessed as individuals and are personally liable under the agreement. Funders often ask for extra documents to show income, such as tax returns. A short trading record can be a factor, because there is less history to assess.
The tax treatment of a lease for business use is a separate matter. It depends on current HMRC rules, which you should check on gov.uk.
How to check your credit file
In the UK, the three main credit reference agencies are Experian, Equifax and TransUnion. Each holds slightly different data, because not every lender reports to all three. You are entitled to see your statutory credit report for free from each agency. Several services also offer free access to your file and score.
Things to look for on each file:
- Accounts you do not recognise, which could indicate identity fraud.
- Wrong addresses, or addresses you have never lived at.
- Late payments that were recorded incorrectly, or accounts shown as open that you have closed.
- Missing electoral roll registration at your current address.
- Financial links to other people, such as a former partner, which can affect how a funder sees you.
If you are declined, and what to check next
If an application is declined, the funder should be able to tell you that credit reference data was used, and which agency supplied it, so that you can check the file. It is not obliged to explain its full internal criteria.
If you find an error, contact the agency and the lender that reported it to ask for it to be corrected. Steps that may help over time include registering on the electoral roll, paying bills on time and keeping card balances well below their limits.
A string of applications after a decline is usually unhelpful, because each formal application leaves a hard search. It is better to understand the reason first.
The size of the upfront payment is sometimes part of how a funder sees the risk. Initial rental explained sets out what it means. It is also worth knowing what happens if a lease ends early, because early termination can leave a balance owing.