A car loan allows you to buy the car you need much sooner, but it can also have the potential added benefit of improving your credit rating.
When you apply for a car loan, you agree to make regular repayments, either weekly, fortnightly or monthly. Any missed payments will result in your credit score decreasing, however, if you consistently make your payments on time, your credit score will improve over time.
Keep reading to learn more about how your car loan and credit rating can impact each other, and what you can do to improve your options for better car finance rates.
A credit rating is a figure that indicates your financial responsibility. The higher your rating, the better.
When you apply for a car loan, lenders will review your credit rating to determine whether you may be a reliable borrower. Having a higher credit rating can improve your interest rates, whereas if you have bad credit you’ll be more likely to pay higher interest on your loan, as you may be perceived as more of a risk to lenders.
Credit score can be impacted by several factors, with one of the main ones being your payment history. This will indicate whether you consistently pay bills or repayments on time and show lenders if you may be a responsible borrower. If your payment history shows consistent late payments, this can negatively impact your credit score, and lenders may view you as a risky borrower, therefore increasing the rates they offer you.
Another factor that may impact your credit score is your credit utilisation. This is the ratio between the amount you owe on your credit and your total credit limit. The lower this amount is, the better your credit score may be.
Age of credit history will also be taken into account. A longer history will provide better evidence of being financially reliable. When you get a car loan, you’re opening a new line of credit. This will contribute to your credit history.
Your credit score impacts financial opportunities, such as the car finance rates you may be eligible for when applying for a loan. Getting a lower interest rate can save you a significant amount of money over the life of your loan.
While taking out a car loan can have a positive or negative impact on your credit, there are ways you can use your car loan to your advantage, and potentially repair bad credit.
Improving credit rating
There are numerous ways you can improve your credit rating, and one of those is via your car loan activity.
If you have a bad credit rating, one way you can improve it is by keeping up with loan repayments. Paying your car loan consistently on time for its entire term can significantly help improve your credit rating. However, it’s important to remember that late payments can be quite detrimental to your credit score, which is why it’s important to ensure you’re able to comfortably afford your car loan and will be able to keep up with your regular repayments. Timely repayments will also lower credit utilisation.
A car loan may be able to help your credit score as it will give you good credit history (provided you keep up with payments), and a long credit history, as car loans generally range between 3 – 7 years. This will show lenders of your financial responsibility.
Opening new credit accounts, such as applying for a car loan, can help increase your credit score. Of course, you don’t want to have too many credit accounts, and you’ll need to act responsibly to keep up with payments.
Improving your credit rating may put you in a stronger position to get a better rate if you want to refinance your car loan later, or if you apply for another car loan in the future.
Applying for car loans
When applying for a car loan, your 360 Finance Specialist will start by talking through your specific needs, budget and relevant personal information, such as your credit rating. They will then compare loan options and car finance rates to find the best option for you.
It’s worthwhile understanding how taking out a car loan can impact your credit rating, and vice versa, so you can get the right car loan for you.
Contact the team at 360 Finance to help you get the best car finance rates on your next loan.