How Much Will A Car Loan Drop My Credit Score?

It’s no secret that buying a car is an expensive endeavor.

Not everyone has the option to save up their earnings in order to purchase a suitable vehicle outright.

When this is the case, the need arises for alternative means of purchase.

How Much Will A Car Loan Drop My Credit Score

Thankfully, there are options suited to most types of income and circumstances. These are called car loans.

You may be reluctant to take out a car loan because of the impact it may potentially have on your credit score.

This guide is going to help you understand the relationship between a car loan and your credit score, specifically whether or not it will drop your credit score.

Bad credit can be a hard obstacle to get past, and nobody needs that stress. So it’s good to be informed before you make such a large decision.

What Is A Car Loan?

A car loan is simply a loan taken out to purchase a car.

This can be a complete sum total of the car itself, taken out from a bank or other financial institution loan company.

Or, it could be a conditional loan from a loan company that lends specifically for the purpose of buying a car.

The terms will vary across the board. You can expect interest on top of the loan terms. Payments are normally spread over a number of years.

Your Credit Score

Your credit score is a number assigned to your overall credit profile.

Credit score factors include credit cards, payday loans, standard loans, mortgages, car loans, phone contracts, and overdrafts.

Though there are more factors, these are the standard common ones.

How high or low your score is, depends on your financial history and how you have handled things such as repayments in the past and present.

Your score fluctuates on a monthly basis, though it can often stay level.

The number of your score dictates what you can do with credit. If your score is low you may struggle to obtain credit, or credit may be expensive for you with higher interest rates.

If your score is high, you will have more options at your disposal.

Things That Impact Your Credit Score

When it comes to your credit score, knowledge is definitely power. If you invest in learning about what impacts your rating, you will have the savvy to influence it for the better.

Positive Impacts

Thankfully, there are a great many things that can boost your credit score.

It all depends on where you’re starting from. For example, do you have no credit footprint at all?

Or perhaps you have struggled with finances in the past, and the consequence has been a low credit score?

If you are the latter, with no credit score at all, you can start to build credit in a number of ways.

Firstly, consider a credit builder card. If you are confident that you can afford a monthly repayment, this may be a great option to take on board.

Things That Impact Your Credit Score

A credit builder card does what it says on the tin. You can often check if you will be approved before applying.

Once your application is done and dusted, and your card has arrived, how you use it will dictate the effect it has on your score.

If you spend smartly, repay on time and stay on top of the interest charges, your credit file will start building up a picture of your financial abilities.

Secondly, there are some small things you can start to get the ball rolling.

  • Open a bank account
  • Stay on top of payment commitments
  • Avoid going into arrears
  • Manage overdrafts and loans efficiently
  • Register on the electoral register
  • Have a permanent residence
  • Don’t apply for lots of credit in a short space of time

Negative Impacts

So now we have seen what can boost your credit score and therefore chances of securing a car loan.

Let’s take a look at what the negative influences on your credit file are.

Firstly, and most relevantly, missing repayments that you have committed to repaying is the biggest and most definite way to negatively impact your credit score.

Every time you miss a repayment, it is recorded on your personal profile. Lenders can see this, and anyone who may consider you for future borrowing.

Each repayment also lowers your overall score, and quickly. It won’t take long until you are in the bottom band of the scoring system if you continue to miss repayments.

Other things that can negatively impact your credit score include:

  • Having too many lines of credit at one time
  • Making too many credit applications at one time
  • Having no credit at all
  • Having no fixed abode
  • Having no regular income

Could A Car Loan Drop My Credit Score?

Now you have all the facts. How do these facts correlate to a car loan? The answer is simple.

A car loan is a major financial commitment.

Could A Car Loan Drop My Credit Score

It must be thought about and planned carefully. You should take a serious wide scope view of your finances, past, and present.

This is the only way to determine whether or not you could afford repayments.

A car loan is more often than not secured against the vehicle you purchase. That means, if you fail to make the agreed monthly repayments, you will have the vehicle repossessed.

If it is repossessed you will no longer physically have access to the car. However, you are still responsible for any outstanding credit taken out to purchase it.

Repossession is common after failed attempts from the lender to recover the money unpaid.

If this happens, it can drop your credit score significantly. As can not paying your monthly fee. Any default such as this will mark your credit file for a large number of years.

Therefore it will be extremely difficult to enter any credit arrangement in the future, should this happen.

Other ways a car loan can drop your credit score include the initial search. Any hard search on your credit file drops your score.

This has a somewhat short term impact, and after an initial period of positive repayment, your score will build back up.

Lastly, the loan itself could potentially drop your credit score and also make it difficult to obtain other lines of borrowing.

This is because, on everyone’s credit profile, the score tends to dictate how much money people are actually willing to lend to you.

When you borrow a larger sum of money such as a car loan, your credit score will drop initially.

It will also dissolve any other options of borrowing for a little while unless your score is perfect.

Final Thoughts

So how much will a car loan drop your credit score? The answer, potentially a lot!

It all depends on how you manage the loan, how much the loan is for, and how you honor the commitment.

If you manage the repayments properly, on time and consistently, then your score will start to grow and not decrease.

However, missing these repayments can quickly drop your credit score and even lead to losing the vehicle entirely.

It will also make it harder to obtain credit in the future and it can even affect your ability to rent or to buy a house.

Landlords and mortgage lenders all look at your credit file before making their decision.

Our advice? Think carefully and consider every corner before entering a car loan commitment.

Brad Johnson