How does applying for a car loan affect your credit score?

Does applying for a car loan affect your credit score?

Buying a car often costs thousands of dollars. To manage this expense, many people opt to take out a car loan to purchase a new or used vehicle.

You might be wondering whether applying for a car loan affects your credit score. The short and simple answer is yes, it does, but the long answer is a little more complex.

To understand how exactly applying for a car loan affects your credit score, and whether it’s a good or a bad thing, it’s important to know the basics.

What is a credit score?

A credit score, also known as a credit rating, is calculated by a reporting agency based on your borrowing history.

In a nutshell, your credit score tells potential lenders how reliable you are as a borrower. Typically, a credit score will be between zero to 1,000 or 1,200 (depending on the credit reporting bureau).

Auto lenders usually use an applicants' score to determine whether their product is suitable for the borrower. Generally, the higher the credit score, the lower the interest rate offered, and vica versa. For example, a borrower with bad credit is generally seen as higher risk for the lender, and as a result, will be offered a higher car loan interest rate. 

A credit report, which is used to determine the score, will detail information about a person’s borrowing habits and history. It includes the types of credit products a person has, their repayment history from the last 24 months, the length of their credit history, applications for new loans, and more.

You can check your credit report and credit score through each of the reporting bureaus: Equifax, Experian, and illion.
You might have a different credit report with each agency, because they are completely separate from each other and generate their reports based on information that is reported to them.

How does applying for a car loan affect your credit score?

Each time you submit an application for a credit product, the lender you’ve applied with will conduct a credit check on you. Each time a lender does this, it will leave what is known as a ‘hard inquiry’ on your report, which can impact your credit score.
This is inevitable, so having this affect your credit score isn’t really good or bad - it’s necessary.

However, submitting multiple credit applications in a short period of time can cause your credit score to dip. This is because it can signal to lenders that you are in financial distress.

So when applying for a car loan, or any credit product for that matter, it can be helpful to space out your applications as far apart as you can.

This doesn’t mean you can’t shop around for a suitable car loan. Instead of submitting multiple applications, you can use a comparison site or do your own research to find a suitable car loan for you.

To minimise the chance of your application being unsuccessful, it can be helpful to have a look at the eligibility criteria of that particular lender and make sure that you meet all of their minimum requirements to apply for car finance.

How can a car loan improve your credit score?

While applying for a car loan might sound scary, it’s really not. Most people have to apply for a car loan, and many people still have excellent credit scores. 

For example, a car loan can actually be a factor that improves your credit score. In particular, by making all of your payments on time.

When you make all of your monthly repayments on time, this becomes visible on your report, which can have a positive impact and improve your credit score.

Your credit score is calculated based on the information on your report, so if all of the information is positive, this should reflect in your credit score.

On the other hand, missing repayments or defaulting on your loan can negatively affect your score. So, successfully managing your car loan, as well as all of your other credit products, is imperative.

Get approval for a car loan today

Ready to get started? At loans.com.au we offer a range of car loan options to suit your needs. Our online application process make it easy for you to get approved in less than 24 hours so you can start saving and drive away sooner.

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FAQs

How does a car lease affect your credit score?

Leasing a car will have a similar affect on your credit score as a car loan. If you make all of your repayments on time, this should positively affect your credit history. However, if you miss repayments or otherwise mismanage your car lease repayments, this can negatively affect your credit score.

Does refinancing a car loan hurt your credit score?

When you apply for refinancing, you will most likely need to submit another credit application. This can affect your credit score, especially if you’re submitting multiple applications as mentioned above. However, if you manage your new loan effectively, refinancing shouldn’t hurt your credit score.