Does car finance affect credit scores?
27 March 2023
By Joy Pearson
The ongoing uncertainty regarding whether car finance can affect a person's credit score is, to be honest, a much simpler debate once you understand the car finance process. I can tell you, honestly, that getting a car on finance can impact your credit score, but in what way? The extent of that impact depends on several factors, which is what I would like to talk about below.
Throughout your journey of applying for a car loan or finance, the lender will typically check your credit score to determine your eligibility and the terms of the loan. This is known as a hard enquiry, and it can have a small negative impact on your credit score. However, the impact of a hard enquiry is usually temporary and will fade over time, especially if you continue to make on-time payments on your loan.
Once you've been approved for a car loan/finance, and start making payments, your credit score can be affected in a few different ways. If you make your payments on time and in full, this can actually have a positive impact on your credit score, as it shows that you're responsible and reliable when it comes to managing your debt.
However, if you miss payments or make late payments, this can have a negative impact on your credit score. Your credit score is calculated based on several factors, including yours payment history, so it's important to make your car loan payments on time to avoid any negative effects.
Another factor to consider is your debt-to-income-ratio. This is a measure of how much debt you have compared to your income, and it can have an impact on your credit score. If you take on too much debt, this can lower your credit score, as it suggests that you may have difficulty managing your payments.
Personally, I have seen the freedom that car finance/loans gives to people, as long as your managing your payments responsibly. By making on-time payments and keeping your debt-to-income-ratio in check, you can demonstrate to lenders that you're a reliable borrower and improve your credit score over time. However, who would I be if I didn't reiterate the fact thats it's important to be aware of the potential negative effects missed payments ot taking on too much debt can have, and to make sure you can afford the finance before you apply.