General Auto Loan Information

How a Car Loan Affects Credit Score


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A car loan credit score worries many auto buyers. A credit score can open doors or slam them shut when it comes to applying for credit, even after one attains financing for a car. Three national credit agencies, Experian, Equifax and Transunion, report your credit history to lenders and other parties. The Fair Isaac Company or FICO handles your credit score or “fico rating.” Making auto loan payments can be a great way to raise your FICO score and get better interest rates on future loans. Here are some tips for making the most of this strategy.

In today's world, your credit score with auto loans is the most important factor in determining what kind of auto loan you will get. So before you even think about going car shopping, get your credit score first. With the tight lending criteria pervading the entire economy today, your FICO score is crucial in determining what type of loan you can obtain.

One’s Credit History Counts

A personal auto loan approval is dependent upon one’s credit score but many consumers do not think about what financing a car will do to credit score. The factors considered when calculating credit scores include how much money one owes, payment history, the length of time one has had credit and the types of financing one has had in the past. A first time car loan applicant may have higher auto loan rates if the person is young, does not have a long credit history, or has had a history of making late payments on previous debts. It is the responsibility of the person who received financing for a car to make sure their rating is impacted positively by making all of the necessary payments on time.

A car loan also affects one’s credit score positively if he/she has a young credit history or a desire to remedy a bad credit rating. At the same time, a credit score can be affected negatively if one neglects to make the assigned payments on time. After so many missed payments, a car can be repossessed, which can ruin a credit score.

It may seem like a no-brainer, but in some cases, your lender may have restrictions on how they report your auto loan. This may be especially true if you are landing from a small dealer or other informal lender who may handle financing themselves. Make sure that your auto loan will go to the books to help you build credit.

How Auto Loan Payments Affect Your Credit Score

Making your auto loan payments successfully is a great way to build your credit but missing them can have terrible repercussions. All loans, including car loans, have a very strong influence on your credit score depending on how you pay them back.

Paying back an auto loan is a great way to restore bad credit or simply solidify preexisting good credit, while enjoying your new car. As long as you have the resources to repay your auto loan every month as agreed, your credit will see the benefits. As all terms and auto loans are different, it's not possible to say exactly how many points a payment will raise your credit. However, you can rest assured that making payments on installation plans like car loans does have a strong, positive effect on credit.

Another way to make loan payment strategies work for you is realize that although getting an auto loan may raise your credit score, it's not a reason to invest in significant financing if you are able to make a large down payment. Debt is ultimately good for the lender, because the borrower will be paying so much in interest over time. If you don't need auto financing, think about all of the potential benefits of avoiding an auto loan and paying cash, or making a large down payment and financing a smaller amount of your vehicle’s worth.

Paying your loan off in full however will not give you an extra credit boost. If you pay your car loan off earlier than originally agreed, you will not get any additional good credit (but it's not a bad thing, either).

How Lenders Interpret Credit Score

Generally speaking, credit scores above 760 are considered “excellent” by almost all lenders. Having credit scores in the 760 and higher range presents little trouble in finding lenders willing to offer auto loans at interest rates reserved for the most creditworthy customers. Individuals with “good” credit scores of between 720 and 760 will also find it easy to secure auto loans at excellent interest rates and conditions.

Beware though—what might be considered an ‘excellent’ credit score by one lender might only qualify for “good” credit by another lender with a more conservative car loan approval standard. The amount of financing that is sought after can also sometimes have an impact on how credit scores are interpreted by lenders.

There is a difference between new and used car loans, as well as the term lengths. According to myFico.com, an auto loan approval request of $20,000 (on both a national average and on a 48-month term) for someone with an excellent credit score should be able to obtain a loan of 3.40 percent under normal circumstances. Unfortunately, we are neither living in normal circumstances nor times. The reality is, your excellent credit is still going to end up getting you a higher interest rate from any car loan lender, unless you qualify for a dealership's occasional offer of zero percent financing, which is even more difficult to obtain.

If your credit score is somewhere below the 720 range, that is good but not great. Therefore, your interest rate would be 4.8 percent, according to the national average. Depending on the situation, the rate could be significantly higher and increase the cost of that $20,000 auto loan approval tremendously. With a FICO score below 620, you are in the subprime car loan lending market and therefore will be looking at 10 percent or above, depending on how low your score actually is.

Getting a Loan Affects Credit

The mere act of taking out an auto loan will have implications on your credit score. Outstanding loans affect your credit negatively, so taking an auto loan may temporarily drop your credit score only until it is repaid. On your credit history, lenders will be able to see that the drop in credit is due to a current loan outstanding. As long as you have sufficient income to cover that loan, and have not previously missed payments, you shouldn't have a problem finding other loans even with this small credit drop.

Dropping Credit by Skipping Payments

Prompt payments have a strong positive effect on credit, though skipping them has a stronger, more negative effect. Skipping payments completely is unacceptable and will result in very big drops in your credit score. A payment is usually considered skipped if it is more than 60 days late. If you make a late payment that is not very late, it is possible that the lender will extend a grace period and will not flag a late payment to the credit bureau, so your credit won't be affected. Don't despair if your payment is only about a week late but do call your lender to explain the circumstances.

What Happens if You Default

Defaulting on a loan is, in short, never something you want to do. It will ruin your credit and the record of your defaulting will appear on your credit history for the next seven years - a long time to pay for one mistake.

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