Your credit scores and credit report are key tools in your arsenal when it comes to purchasing and investing in key products and services such as homes, expensive equipment, and cars. Good credit scores are one of the most effective ways of showcasing to a panel of lenders that you’re a responsible borrower and someone who is well equipped to make the necessary monthly repayments because you have the proof, in the form of a good credit rating, of doing so over a significant period of time. In contrast, a bad credit rating can make getting finance plans from lenders and finance companies much more difficult, and costly, because your overall risk is higher than someone with a good score. Thankfully, there are plenty of bad credit car finance options and, just because your credit file is less than ideal, that in no way means you can’t get the vehicle you require, or desire.
In this blog, we’re going to be examining how car finance lending decisions impact your credit score and ability to undergo successful loan applications. This will give you a better idea of how your credit history, checks, and previous loans will lead to an easier, or more difficult, time with a company that lends out money.
How Car Finance Impacts Your Credit Score
As we mentioned, car finance, along with other finance applications, impact your credit score. However, if you have saved up the cash over time, and are ready to pay for the vehicle outright, then this won’t affect your credit score. Your credit score isn’t relevant to cash payments because you’re paying for it outright, with no financial help from people or businesses. Unfortunately, because of personal circumstances and financial circumstances, not everyone is able to pay for a used car with thousands of pounds of cash that they have saved up – which is why the majority of them will go through the finance process. Therefore, a panel of lenders will have to undergo a wide range of credit checks to assess an applicant’s financial situation, before determining whether or not they are happy for them to be accepted for a finance package, make the monthly payments, and generally complete the finance and buying process smoothly.
In terms of impact, if you have a good credit report then your credit searches should be nothing more than a formality. Yes, the checks will appear on your records but that’s nothing to worry about. The bigger impact of car finance on credit checks comes when they are more frequent. These so-called ‘hard checks’ appear each time, so if it is proven that you have repeatedly tried and failed to get a credit application approved, this will affect your score because it indicates a level of panic and desperation, which doesn’t lead to lenders thinking you’re less of a risk.
To reduce that impact, opt for ‘soft credit checks’ that give you a general idea of what you might be paying in terms of deposits, monthly payments, and annual interest rates. It won’t be a definitive answer, but it also won’t appear on your credit file giving you the time and space to shop around for the right one. You should only opt for a certain hard credit check when you’ve found the car you want, at the budget and affordability level that is right for your individual circumstances.
What Else Impacts It?
The other major effect car finance has on your credit score is the approach you take to the monthly repayments. If each of the monthly payments is made on time, it’ll positively impact your score because it will show you can avoid missed payments, and are sensible enough to manage your budget and finances. Clearly then, the opposite will be felt if you do miss monthly repayments, or make late repayments – both these can affect your credit score and should be avoided.