How a car loan affects your credit score

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If you’re on the hunt for a new set of wheels and looking to buy with finance, you might be wondering, does a car loan affect your credit score? This is definitely something to consider when taking out any type of credit product.

The reality is that all types of financing have the potential to affect your credit score, both positively and negatively, and at different stages of the borrowing process.

To better understand how a car loan could affect your credit rating, it helps to know how credit scores are calculated.

When determining your credit score, the major Australian credit bureaus, Experian and Equifax, consider a range of factors, including:

  • Credit applications
  • Credit used vs available
  • Types of credit
  • Refund history
  • Length of credit history

The extent to which these factors may influence your credit score is not publicly available information. But it should be noted that a car loan can impact most of them in one way or another.

Will getting a car loan help my credit rating?

Since the introduction of full credit reporting, credit grantors are required to report positive credit events in addition to negative events.

This means that your auto loan could actually improve your credit score if you take the opportunity to consistently demonstrate responsible credit behaviors.

By consistently making your auto loan payments on time and making a concerted effort to avoid late payments, your repayment history could benefit your credit score.

Could getting a car loan hurt my credit rating?

On the other hand, there are several ways a car loan could harm your credit score, including the following scenarios:

1. Submit multiple auto loan applications:

Each time you apply for credit, the loan provider will perform a credit check which will be recorded on your credit file as a thorough inquiry. If you submit multiple car loan applications at the same time or in close succession, you risk hurting your credit score.

2. Missing payments:

Forgetting to make your car loan payments or paying them after the due date could hurt your credit score. As a general rule, the longer the payment is overdue, the more serious the event is likely to be considered and the more impact it could have on your credit score.

But keep in mind that while a one or two day late payment may not pose the greatest risk to your credit score, you’re still likely to be penalized with late fees.

3. Repay your car loan:

This one might seem counter-intuitive, but it’s worth noting that reaching the end of your car loan term and making your final payment could cause your credit score to drop initially. The main reason for this is that it will no longer be listed as an active account in your credit file, so if this is your only form of credit or your longest held account, the length of your credit history credit will be shortened.

A longer credit history tends to be more desirable to lenders because it allows them to see your long-term credit behavior. However, any potential reduction in credit rating following repayment of a loan will likely only be temporary – so there is no reason to delay that final repayment.

What credit rating is needed to get a car loan?

Credit grantors generally determine auto loan interest rates based on credit rating. Borrowers with excellent credit will often be rewarded with the most competitive interest rates, while borrowers with average or poor credit tend to be offered higher interest rates.

There is no specific credit score that will guarantee approval for a car loan, but in general, the higher your credit score, the more desirable you will be as a customer of lenders.

So while a car loan has the potential to both positively and negatively affect your credit score, doing your due diligence and managing your credit responsibly can give you the tools you need to protect it in the long run. better.

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