Considering purchasing a new vehicle on finance but worried about how much a car loan affects your credit score? Whether you’re a first-time car buyer or looking to upgrade your current vehicle, having a good understanding of your credit score before applying for finance is crucial. Further to this, understanding the relationship between your credit score and any financial product you take out is important to be able to make informed financial decisions. In this blog we’ll have a look at how a car loan affects credit score and explain the process of applying for a loan.
For more information on understanding your credit score, click here to learn more about understanding your credit rating.
Overview of how a car loan affects credit score
Any credit enquiry you make or financial product that you sign up for will have an impact on your credit score, but how a car loan affects credit score will depend on a variety of factors. When you borrow money to finance a purchase, it adds to your overall debt, which may cause your credit score to decrease initially. However, if you manage your loan responsibility and make all your repayments on time it will demonstrate an ability to handle debt. This may result in a positive impact on your credit score over time. Additionally, having a mix of credit (e.g. credit cards, mortgage, and a car loan) may be viewed positively and demonstrate financial reliability.
Another factor to consider is your credit score prior to taking out a new car loan. If you have a history of missed repayments and poor financial behaviour, applying for another financial product may indicate to lenders that you are experiencing financial difficulty. On the other hand, if you have a high credit score and a clean credit history, the impact of a new enquiry will be minimal.
Understanding the pre-approval process
Here at Fido Finance, we specialise in providing obligation-free pre-approvals in as little as an hour! A pre-approval is when a lender agrees in principle to lend you a certain amount of money based on your serviceability. A pre-approval typically involves a soft credit enquiry which is not visible to other creditors or lenders and does not impact your creditworthiness. This allows you to explore various pre-approval options without leaving a trace on your credit history whilst you shop for that new car with confidence. It’s important to note that a pre-approval will often be conditional on certain requirements being met and is not a guarantee that your final application will be approved. Having a pre-approval gives you peace of mind whilst you search for a vehicle within your approval price range, without locking you into anything.
If you are concerned about inquiries being made on credit report during the pre-approval process, ensure you have a conversation with your broker about this.
Hard enquiries on your credit report
Once you are ready to proceed, as part of the formal application process a “hard enquiry” will be made on your credit file. This will have an impact on your credit score, and will remain on your credit report as an inquiry for up to five years. It’s important to limit the number of hard enquiries made on your credit report to avoid potential negative impacts on your score. A high number of enquiries may be viewed as a red flag to lenders, particularly if there have been multiple enquiries over a short period of time. Multiple inquiries may indicate that you are experiencing some level of financial difficulty and may impact your chance of your approval, or mean you are offered a loan at a higher interest rate.
To avoid multiple enquiries on your credit file when purchasing a car, it’s important to take the time to shop around and compare multiple options before agreeing to anything. By limiting the number of enquiries, you are limiting potential negative impacts of how a car loan affects credit score.
Get in touch with our finance broker team today to learn more about how a car loan affects your credit score
Navigating the car loan process can be overwhelming, which is why the team at Fido Finance is here to make the process as simple and stress-free as possible! No need to worry if you’re unfamiliar with the intricacies of the finance industry, your personal broker will have the in-depth knowledge and skills to guide you on your journey to making an informed decision. With access to over 40 specialised bank and non-bank lenders, we are here to help.
Get in touch with the team at Fido Finance by calling us on 13 FIDO today! Let us assess your unique circumstances and help you explore car loan options based on your credit score and financial goals.
