How Does Car Finance Affect your Credit Score?


When it comes to getting a car on finance, your credit score is really important. If you have a low credit score, you may be worried about getting accepted for a car loan. Lenders will usually require you to undergo a credit check when you apply for finance so they can see what type of borrower you have been in the past. Your credit score reflects your past behaviour and any missed, or late payments may mean you have a low credit score. This increases the risk to the lender as you are more likely to default on future loans. But how is your credit score affected throughout the car finance process and can a car loan harm your credit file? The guide below looks at this in more detail.

Why is credit score important?

Your credit score is a really important aspect of your financial life. When applying for any sort of mortgage, loan, credit, finance or even a mobile phone contract, you will usually be required to have a credit check performed against you. Lenders want to know the likelihood of you paying back your loan on time and in full is. Based on your previous behaviour and your ability to meet repayments, lenders can then decide whether they want to accept you for a loan or finance and the interest rate you will be offered.

Can car finance negatively impact your credit score?

There are many benefits of getting a car on finance, not only can you spread the cost, but you can also get a newer car than you would with cash alone. However, not sticking to the rules of your agreement can have a negative effect on your credit and it can be harder to get accepted for car finance with poor credit in the future too.

  • Multiple applications in a short space of time. One of the ways your credit score can be negatively impacted by car finance is when drivers make multiple applications with different lenders in a short space of time. Each time you do this, a credit check will be performed on your report. This can harm your credit score and also indicate to lenders that you are desperate for credit and keep getting declined. Instead, you could use a soft search credit check or consider a car finance broker to help you.
  • Missed or late repayments. Car finance is a legal requirement and one of the rules of your agreement is that each and every payment must be made on time and in full until the end of the agreement. When you make a late repayment or miss a payment, your credit score can be massively affected, and it seriously implicates your ability to get finance or credit in the future.
  • Default on your car finance. When you miss multiple car finance payments, you will be declared delinquent but your lender and then your loan will go into a default. Once in default, you will be contacted by debt collectors and if the loan is secured against the car, the lender will take the car off you. A default will then stay on your credit file for 6 years and it can be nearly impossible to get a lender to give you a loan during this time. 

How to use car finance to increase your credit score.

Mishandling your car finance agreement can have a detrimental effect on your score but there are ways in which getting a car on finance can help to increase your score.

  • Make payments on time. The best way to use car finance to better your credit is to keep on top of all of your current repayments. Showing evidence of being able to make payments on time and in full on all of your current debts can increase your credit score.
  • History of a credit mix. It can also be beneficial to have a mix of credit on your report to show that you can handle different loans and finance. Many people are under the assumption that having too much credit is a bad thing but keeping your usage low over a few different accounts and meeting all the repayments can be one of the best ways to better your credit.

Refinance for a better rate. If you do have a low score and need a car, you may have to take a loan with a higher interest rate at the start of the agreement. However, once you’re about halfway through your agreement and you have paid all your debts on time, you could refinance your current loan for a better rate. By using your car finance deal to show lenders that you can handle credit responsibly you could use your new, better credit score to help get you a better rate and save you money on your deal.


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