Does car finance affect your credit score?

Car finance and credit scores go hand in hand. Ensuring you have a good credit score and keeping healthy financial habits is important, so you may be wondering how getting car finance affects your credit score? When taking out car finance, there are numerous stages in which your credit score may come into play. To learn how car finance can affect your credit, we’ll break down the car finance process and run through how your credit is involved in each step.  

Applying for car finance.  

When you apply for car finance with us, we’ll need to peek at what your current credit score is. Our lending panel consider your credit score when deciding whether they want to offer you a finance deal. As the car finance broker, it’s our job to help introduce you to a lender who has the best rates for your situation.  

To get to know you better and put your application in front of the best lenders, we only provide a soft search on your credit report. This won’t affect your credit score, nor will it be recorded on your report. It also only gives us (and the lender) a glimpse into your credit situation, rather than the full history. 

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Securing the deal.  

Ok, so you’ve applied, found a lender with the best rates, and you’re signing on the dotted line. But you may be wondering how does car finance affect credit score when the deal is paid out? When your car finance deal gets put in place, you may notice a slight drop in your credit score. One of the influential factors on your credit score is how much available credit you have and how much you’re borrowing. Taking out a car finance deal will increase the amount of money you are borrowing. However, once you start paying back your loan (on time and in full), you should see your credit return to normal.  

Making your car finance payments. 

Your ability to make payments on time has an impact on your credit score. Once you’ve got a car finance deal in place and you start making repayments, you can use your deal to improve your credit score! As long as you keep on top of your car finance, and any other financial commitments you have, you should see your credit score reach new heights!  

However, on the flip side, your credit score can be negatively impacted by car finance if you don’t pay on time. It can be easier to get car finance with a good credit score because you are less of a risk to lenders. A low credit score due to missed payments can make it harder to borrow money in the future and you could even be refused car finance. Before you commit to taking out a car loan, you need to be confident you can meet every payment over the term and your situation won’t change any time soon.  

Refinancing your car.

Refinancing a car loan is a popular way to replace your current deal with a new one, usually with better terms. Similarly to when you take out a car finance deal, your credit score can be temporarily affected when you refinance too. This is because it adds another loan or even a hard search credit check on your file. However, once you start making payments, you should see your score return to normal.   

Paying off your loan early.

If you’re looking to end your car finance agreement early, you may be wondering what happens to your credit score. In theory, paying off your loan early is a good thing, right? Well, not always. When you choose to settle a car loan early, your credit score may take a hit. When you have an active account open, such as a car on finance and you make payments on time, it is a positive to your credit score. Closing an account can have a short-term negative impact. However, ultimately it shows that you can handle credit correctly and your score should return to normal after a few months.

Making overpayments. 

Overpaying your car finance is when you pay more than the fixed monthly payment. These extra payments go towards the outstanding balance and can help you to pay off your loan faster. In theory, making regular or even a one-off over payments on your car finance deal shouldn’t harm your credit. If anything, it shows good financial security that you’re able to make overpayments.