Buying a car is likely one of the largest purchases you’ll ever have to make. This is why so many people are turning to car finance in order to make the process more manageable and affordable. However, occasionally we come across doubts about whether getting a car loan might hurt your credit.

This article will detail the different ways that getting car finance on your new vehicle might impact your credit – both positively and negatively.

What is a credit score?

Whether you know it or not, you will have a credit score. A credit score is used by lenders to understand your financial history. Furthermore, it allows them to make a judgement on whether you’re a good candidate for future loans. As such, lenders will perform credit checks on you to gauge this. These are known as either hard or soft, depending on whether they impact your score.

Credit reference agencies

Almost all forms of personal finance will impact your credit score. This is typically provided by different companies known as credit referencing agencies. Your number will usually be between 300 and 850. Generally, the higher it is, the better your credit rating – but there are variations between the companies who provide your score rating. In turn, this will impact where you sit on the spectrum of credit. A score of 500 with TransUnion would be below average for them, for example, but good for the provider Equifax.

Payment history and your credit score

Your payment history has a huge impact on your credit score, as does your history of applications. This is why if you make payments on time, this will positively affect your score. Conversely, there are things that might indicate to lenders that you’re a riskier candidate for a loan. For example, if your credit report shows missed payments or defaults, if you’re paying off multiple loans, or if you are near your credit limit. Your credit score might not be the singular factor in whether you’re approved for a loan. However, it will have an impact on your chances.

How does a car loan impact your credit score?

As with most things, getting car finance has advantages and disadvantages for your credit score. It will entirely depend on how you manage your repayments. It’s important to realise that when you first get your car finance loan, it will likely make a slight dent in your credit score. This is because it’s a hard enquiry into your credit history. However, if you are regular and on time with your repayments, this will soon bounce back.

Advantages of car finance on your credit score:

  1. If you make your repayments on time every time, this might have a positive impact on your overall credit score. In essence, it shows lenders that you’re a safe bet for future loans. Be aware, however, that this can take time to show up on your credit score.
  2. It diversifies your credit mix. Your credit mix refers to the types of credit that you have on your roster, which is usually divided between revolving credit (like credit cards) or instalment credit (like car loans). Lenders like a mix of both, so adding car finance onto your profile can make you more appealing for future loan applications. This in turn boosts your credit score.

Disadvantages of car finance on your credit score:

  1. If you are late on your repayments or miss one or more payments, your car loan is considered delinquent. You’ll typically be given a grace period to make the payment back. However, if your lender is required to take further action against you then your credit score will be negatively impacted. For example, if a full billing cycle goes by without you making payment. Consequentially, you might find it harder in the future to find good interest rates or a loan.
  2. If you default on the loan, your credit score will also be impacted. Should you continue to not make payments, the car finance lender may involve debt collectors, who could repossess your vehicle. Each of these elements – late payments, default, transference of the account to debt collectors, or repossession – leave a separate mark on your credit report. Furthermore, they’ll stay there for up to seven years, and they have a significant negative effect on your credit score.

Car finance and credit scores: what to know

Before you begin your hunt for car finance, it’s also important to understand the difference between different kinds of credit checks. This is because finance companies may conduct either a hard search or a soft search on your credit score.

Hard searches:

Some finance companies will conduct a hard search or enquiry on your credit report. This is a process that begins when you first apply for credit, and it requires your consent. However, it won’t happen if you’re only looking for pre-qualification to decide whether to apply.

A hard enquiry will take points off your credit score. This is temporary – usually staying on your report for two years – but will be visible on your credit report. It’s therefore best to limit the number of hard searches taking place on your score. You can do this by checking in advance of application whether you’re likely to be approved.

Soft searches:

Soft searches, by contrast, won’t impact your credit score. As such, they can take place without your knowledge. This kind of check is designed to give a ‘footprint-free’ check on your credit score, without lenders seeing any evidence of it. It aims to give you an idea of whether to enter into the terms of a car loan, without negatively affecting your score in the first instance.

Speak to My Car Credit today to find out more

If you want to find out more about whether or not getting a car loan will hurt your credit, speak to My Car Credit today. Our friendly team can help you get a car finance quote with a soft search that won’t impact your score. From there, you’ll be able to discuss your viability for a loan with one of our advisors. Get in touch today.

Rates from 6.9% APR. Representative APR 14.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed

Good

  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs

Fair

  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit

Poor

  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past

Bad

  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan
£

X monthly repayments of
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score

Representative Example

Borrowing £7,500 at a representative APR of 14.9%, annual interest rate (fixed) 14.85%, 47 monthly payments of £204.69 followed by 1 payment of £214.69 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £2,335.12, total amount payable is £9,835.12.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!