Taking out a car finance loan - or any loan for that matter - will in some way impact your credit score, but it won't necessarily be negative.
Each individual is responsible for their credit score, and if you make your repayments on time, the chances are you will see your score improve and therefore make yourself more attractive to lenders if and when you take out future loans.
If you fail to make your repayments on time, your credit score will decrease because you don't agree to the terms set out when you signed the contract. In turn, it reduces your chances of taking out future loans while potentially having your car taken away by the lender.
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In this current cost of living crisis, making your repayments can be increasingly challenging, on top of all the other bills you have to pay. With rising inflation, interest rates, and more, you could feel more pressure to stay on top of your borrowing.
In this article, we'll look into credit and car finance in more detail and help you understand everything you need to do to stay on top of your repayments.
What is a credit score?
In the UK, everyone that has had credit has a credit score. Having credit can range from taking out a mobile phone contract to having a mortgage or taking out car finance. Every credit purchase you've made gets tracked.
There are many credit reference agencies available that put together your score just from a few pieces of information provided by you; you can discover your score by downloading one of the apps, that you'll find from a simple Google search.
The better your history of taking out credit and making your repayments on time, the better your score will be and, therefore, your overall affordability and access to taking out the loans you want - and generally with lower interest rates attached to them.
Your credit score will fluctuate over time, even if you feel like you're not doing anything different. There are various factors aside from the actual borrowing that can impact your score, such as being on the electoral roll, living at the same address for several years, and your salary.
Does applying for car finance affect your credit score?
When it comes to car finance, you should know the significant ways it can affect your score.
A soft credit check does not impact your credit score and will not appear in your credit history. It's just a search that will skim over your details to initially check your affordability and give you a decision in principle.
When a lender carries out a full credit check, also known as a hard credit search, this will appear in your credit history so other lenders will know if and when you previously applied for a loan.
It's critical that you understand what you could borrow before making a formal application. If you apply and get rejected, that's not necessarily the end of the world; if you get disapproved multiple times, your credit score and history will be severely damaged and could affect your future loans.
A lender doesn't like risk, and if they see you have bounced around requesting multiple loans, they will be less likely to want to give you what you want. Remember, they trust you to repay a large sum of money, so need to have confidence in you.
In summary, applying for a car finance loan shouldn't affect your credit score unless you do so multiple times and get rejected, as this will appear on your history and make lenders less likely to accept your loan request.
Does car finance help improve your credit score?
When you are approved and have your car finance loan in place, you have to start making your monthly repayments as agreed at the start of the term.
Although making fixed monthly repayments may seem daunting - especially as car finance loans typically last anywhere between 12-60 months - you will likely see your credit score rise if you make the repayments on time.
The reason is you are proving to your current - and future - lenders that you can make payments on time, and as a result, your overall score will increase.
It's a great way to make yourself more attractive to future lenders, especially if you are considering a mortgage or other large loan type.
On the other hand, if you fail to make a repayment or it's later than agreed, your credit score could start to slide as you can't make the repayments by an agreed time or date.
It could mean that in the future, you struggle to take out new loans or, if you do, are offered loans with higher interest rates, meaning you'll end up paying a lot more down the line.
It's critical that you make your repayments on time, and if you can't, let your lender know as far in advance as possible to avoid negatively impacting your score.