We use cookies to help us improve and protect our services. By continuing to use the site, you agree to our Privacy and Cookies Policy
Close cookies banner
Creditspring logo
does car finance affect your credit score?
does car finance affect your credit score?

Written by:

Does Car Finance Affect Your Credit Score?

Buying a new car is probably one of the most significant purchases you'll ever make. Depending on whether you make your payments on time and repay the loan in full as agreed. Car loans can either hurt or help your credit.
Instagram LinkedIn TikTok Facebook Twitter

Let's explore the subject a little more, including how to avoid any negative impact on your credit score and whether car finance can improve your credit history.

Does applying for a car loan affect your credit score?

The first thing you need to know is that lenders conduct credit checks when you apply for a loan. But it's important to understand what it means to 'apply for finance' because you will typically be presented with two options from lenders.

Hard searches

Some financial institutions will run a hard search on your credit record. You must give your permission for this process to begin when you initially apply for credit.

Your credit score will be reduced after a hard inquiry. This is transient and will be shown on your credit report for a maximum of two years. So it's advisable to keep the number of hard inquiries on your score at a minimum.

If, however, all you're looking for is pre-approval to help you decide whether to apply, only a soft search will be conducted.

Soft searches

In contrast, a soft search has no effect on your credit score. They may therefore occur without your knowledge. This type of check is intended to provide a "footprint-free" evaluation of your credit score without the involvement of lenders.

Without initially harming your score, it gives you an idea of whether you will be approved in principle for the loan you want to apply for.

Remember that lenders are risk-averse and may either refuse to extend credit or charge a higher interest rate if they have any reason to believe you won't be able to repay the loan.

Handling credit well shows lenders that you are responsible and a lower risk to them.

Can car finance help your credit rating?

We are now aware of the negative effects that vehicle loan applications can have on your credit score, but what about actually obtaining and repaying a car finance agreement?

In reality, how you handle your repayments will have a huge impact on how your car finance affects your credit. Making repayments on time will show that you can repay a loan effectively and handle your credit well.

On the other hand, your credit rating could be seriously harmed if you make late payments, fall behind on your payment plan, or if a lender takes action against you.

As a result, you might find it more difficult to get acceptable interest rates in the future, or you might have trouble finding a lender willing to grant you credit at all.

Here are a few ways that car finance can help your credit score:

  • Your total credit score can benefit if you consistently make your repayments on time. It proves to finance companies that you're a reliable borrower. However, keep in mind that it can take some time for this to appear on your credit report.

  • It helps to add to your credit mix. Your credit mix refers to the different credit products you have, which are typically broken down into revolving credit (such as credit cards) and instalment credit (like car loans). Car financing can improve your profile and make you more appealing for future loan applications because lenders like a mix of both. This raises your credit score as a result.

Here are a few disadvantages:

  • Your car loan is seen as overdue if you make payments late, or miss one or more instalments. Usually, you'll have a grace period to catch up on the missed payment, but your credit score will suffer, though, if your lender is forced to take further legal action against you. For instance, if a complete billing cycle passes with no payment from you. Also, it can make it more difficult for you to get credit or good interest rates in the future.

Your credit rating will be affected if you default on the loan. If you keep skipping payments, the lender may hire debt collectors to seize your car. Late payments, defaults, giving the account to debt collectors, and repossession all leave their own traces on your credit record. Additionally, defaults can last up to six years and significantly lower your credit score.

How it impacts your credit

Having county court judgments (CCJs), involuntary arrangements (IVAs), and bankruptcy will stay on your credit file and be visible to other lenders for at least 6 years, if not longer. 

Missing payments and getting into arrears will lower your credit score.

Additionally, you should refrain from opening joint accounts or mortgages with people who have a terrible credit history because prospective lenders might link you to them, and this could restrict your ability to borrow.

How fast can car finance improve my credit?

It might take a while before repaying credit of any kind has a positive effect on your credit score. It usually takes a few months of consistent on-time payments to see an improvement in your credit history as credit reference agencies update their records at different times.

Make sure your credit is ready

Whether you're looking to buy a new vehicle or a used one, you will probably need to get a car loan. But before going to the dealership to apply for financing, make sure your credit is in good shape to get the best loan terms.

Get a copy of your credit report first, and carefully analyse it. Next, find out where you stand by checking your credit score. Good credit (Equifax sees this as 531 or better, while a good score with TransUnion is anything over 604) increases your chances of getting approved for favourable loan terms.

If your credit score is excellent (800 or better), you can even be eligible for great rates like financing with a 0% APR.

Higher interest rates on your auto loan are typically associated with worse credit scores; over the length of the loan, this can add up significantly.

If your credit isn't up to par, improving it before you shop for a car could save you thousands of pounds in interest payments.

What happens if I miss a payment?

Your credit will suffer if you fail to make your monthly car loan payments on time. If you only miss one payment and make it up immediately, this will reduce the negative impact .

But your credit score will drop if you consistently skip payments over a period of time or get into arrears, which will also affect your ability to get credit in the future.

How can I reduce the cost of my car loan?

By borrowing less, you might be able to lower the cost of your personal loan. For instance, you could buy a more affordable car or use cash reserves to pay for a portion of the purchase price.

Even if it seems counterproductive, you might be able to reduce expenses by taking out more debt. 

A sample APR of 8-9% can be applied to loans between £3,000 and £4,999, but when the loan amount reaches £5,000, the lender may reduce the APR to 3-4%.

Can I repay my car loan early?

Yes. If you prefer to pay for your car outright, you can request the lender to give you an ‘early settlement amount’, which represents the total you have to pay to cover the purchase completely. 

This among will include any monies you still owe (capital) plus, in some cases, a penalty to cover the potential interest you would have paid if you completed the loan term. 

The interest will be a maximum of 28 days if there is less than a year outstanding on the contract, but another 30 days’ interest total can be added to this if there is more than 12 months outstanding on the loan contact. The maximum that can be added as a penalty is 58 days.

This is governed by the Consumer Credit (Early Settlement) Regulations 2004. Keep in mind that you will have to pay the settlement amount within 28 days after receiving it from the lender. 

Keep an eye on your credit score

Once you've bought your car, make sure to pay your loan instalments on time. Schedule automated payments or put the due date for your payments on your calendar - just make sure you have enough money in your bank account to cover them.

Consider enrolling in a free credit monitoring service to track the impact your auto loan is having on your credit score. You will receive monthly credit reports, alerts when your credit score changes, and notifications of any action on your record. 

When it comes to your credit, maintaining control is the best approach. 

Join Creditspring
Are you ready to start your journey with Creditspring?
Check your eligibility