A car loan will affect your credit score, whether you know it or not. If you take out a car loan and can pay off the debt in full, then what happens to your score? Nothing. But if you end up defaulting on the loan, that can have a lasting impact on your score for several years. Below are five ways a car loan affects your credit score.
1. It Affects Your Credit History
Your credit history is what lenders will look at when deciding how to deal with you. It’s a direct reflection of how responsible you are, as well as how hard you work at building a good credit score. And since there’s more than one way to get a car loan, your history reflects that. For example, if you have five auto loans in the past 10 years, it’ll show up. However, if you’ve had one loan in the past two years and paid it off on time, that’s going to look much better.
2. It Helps Build Credit
If you’re getting a car loan for the first time, it’s going to help build your credit score, but it will only be temporary. Why? Because like all loans, this will eventually end and impact by lowering your available credit. That’s why lenders can get you a lower interest rate. And since it’s one less open line of credit, that’s better for the lender.
3. It Affects Your Credit Report
Lenders can pull your credit report and look at the data they want. But if you’re making payments on time and taking care of it, then the lender will see that and move you along in the process. Auto Car Loans will make decisions based on what’s on your credit report, too. The higher the score, the better chance you’ll get a lower interest rate.
4. It Increases Your Debt Service Ratio
This is how much you’re paying each month for the car loan. It’s how the lender determines whether or not your car loan is a good deal. If your debt service ratio is too high, it makes borrowing a car more expensive. That’s why it’s important to make sure your current car loan gets paid off before you go for another one.
5. It Can Affect Your Credit Limit
The lender will look at each applicant’s debt service ratio. This is basically how much credit you’re using compared to how much credit you have available. If the lender sees that you have a lot of available credit, but you’re using it, they may reduce your credit limit. But if you are making payments on time and paying down the loan, this will look better for the lender. It’ll also help build your score.
A car loan will affect your credit score, whether you know it or not. Depending on the type of loan you get, it’ll either help your score or hurt it. That’s why you need to take time to understand the car loan and how it will affect your finances
About the Author:
Ray is a sought after thought leader and an expert in financial and money management. He has been published and featured in over 50 leading sites and aims to contribute articles to help novice financial planners. One of his goals is to impart his knowledge in finance to educate and help ordinary people create and achieve their financial goals.