You’re looking to get a car loan to cover the cost of your next car and wondered will this affect your credit score?
It’s a valid question, and in this blog post I’m going to tell you whether a loan will affect your credit score.
What Is A Car Loan?
I’ve already covered the difference between a car loan and car finance, and highly recommend you check those posts out if you’re curious about what direction to go.
But to just briefly go over what the differences are for you here…
A car loan is essentially a loan that you get with your bank to spread the cost of your car over many years.
When compared to car finance, a loan could be better as you’re likely to get lower interest rates.
Car finance on the other hand, such as PCP finance is a great way of getting into a newer car.
Or a more expensive car with lower monthly payments.
Have a read here if you’re unsure whether PCP car finance is right for you.
What Is Your Credit Score?
Regardless of whether you’re looking for a car loan or car finance, your bank or lender will need to quickly determine whether you’re likely to keep up with monthly repayments.
This is where your credit score comes into play.
A credit score is simply a number that’s used to determine your likelihood of repaying money back to your lender.
Your credit score will take into account your past financial history, payments, outgoings, online credit card searches, previous car loans and more.
But don’t worry – getting a car loan will likely require a soft search to be performed on you.
This is where the lender will do a check to find out whether you’re eligible and will do a few checks to see if you can repay the loan.
How To Improve Your Credit Score For A Car Loan
In order to be confident that you’ll be able to get into the car of your dreams with low monthly payments, you’re going to need to first improve your credit score.
This will require you to make regular, small credit card purchases and pay them off in full when your statement arrives each month.
By paying credit card payments off in full, you’re going to make sure that you’re able to improve your credit score over time.
This will take some time, and doesn’t happen overnight.
There’s no magic spell or trick that will make your credit score go up overnight in order for you to get a loan.
It could take you months if not years.
Will A Car Loan Make My Credit Score Go Down?
When you initially take out your car loan, the first few months will likely see a drop in your credit score…
This isn’t something you should be worried about as long as you keep up with regular monthly repayments on your loan.
The amount in which your credit score goes down will depend on your previous credit score and history.
When I took out a loan with my bank I had no credit score, meaning I was at the default number that most people have when they don’t have credit history.
After a month, my credit score dropped by around 30 points, but I was able to get those back within 3 months.
I kept up with regular loan repayments and had a credit car that I was making small purchases with.
