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    Does A Car Loan Improve Your Credit Score?

    Car Loan&Credit Score

    When you apply for a car loan, lenders will pull your credit score. This is known as a hard inquiry and it lowers your credit score by a few points. This is temporary, but when you start paying off the loan on time, it’ll significantly increase your credit score.

    Here’s how you can efficiently take out an auto loan while working strategically to push your credit score higher to receive better rates and quicker approvals in the future.

    What Factors Affect Your Credit Score?

    A good credit score is an important factor reflecting your capacity to repay loans. It allows you to get better rates and increases the chances of financing approval. Here are the most important factors that affect your credit score.

    Taking Out A Car Loan

    Taking out a car loan doesn’t help much with the score. As a matter of fact, the loan will initially lower your FICO score by a few points. This is because the new loan will be added to your outstanding debt balances and will be reflected on your credit report. Thus, it isn’t a good idea to take out multiple loans at the same time.

    Once you start making the agreed repayments every month, the lender will report your payment history to credit bureaus like Equifax. Every on-time payment will be reflected as a positive step, thus increasing your score. 

    Missing A Car Payment

    Missed car payments are one of the most common reasons for low FICO scores. Irrespective of the fact that you just forgot about the due date or you did it willingly, every missed payment will be reported to the credit bureaus. The concerned agencies will mark this as a negative, which will then impact your score.

    Even if you make extra payments to cover the one missed payment, the negative entry will stay on your FICO score for at least 7 years. After that, this record will automatically be removed. However, the good news is that most lenders provide at least 30 days of extra time before they report missed payments.

    Refinancing Your Car Loan

    If you refinance your existing car loan, it doesn’t make much of an impact on your credit score until you begin fulfilling the repayment schedule and keep making regular payments. 

    When you refinance the loan, your older account is closed and the refinanced loan gets added to your report almost immediately. Hence, your score remains even. After that, it is the same process as it was with the original loan - every missed payment will lower your score, and regular payments will help increase it.

    Paying Off Your Loan

    If you pay off the car loan on or before the agreed term, your FICO score will go up. After the loan is removed from your report and your debt-to-income (DTI) ratio falls, your credit score will likely remain unchanged.

    Since you paid off the loan sooner than the agreed term, you won’t be making further payments. This means that your credit score won’t increase any further as lenders won’t have anything to report back to the bureaus.

    Car Loan Delinquency

    Not paying your loans on time, otherwise known as defaulting on the terms, will have serious repercussions for your score. For every missed payment, the lender will report it as negative to the bureau. This will lower your FICO score substantially.

    Moreover, when you stop making payments for a long period, your account will be marked as NPA (non-performing asset). This will lead to continuous negative marks on the score, and these records will remain on your report for 7 years.

    Car Repossession

    When you miss payments for too long, the lender will repossess your car. The car is the collateral for most auto loans, and when you stop making payments for 270 days or more, the lender has the legal right to seize it. Repossession is a big negative mark on your credit history, and there are minimal chances of making it better.

    Then again, if your car is repossessed, it means that your FICO score has already experienced a serious dent that will take years to repair.

    Bottom Line

    Make sure that you have the money available to pay for any additional debt from an auto loan before you decide to take one. Calculate your expenses and plan out your monthly budget so you can make timely payments and avoid any negative shocks for your credit. 

    If you face financial hardship, get in touch with the lender directly. Be sure to pay the fines and charges in case of missed payments to keep your credit score healthy. Most importantly, when you stick to the agreed repayment terms, your FICO score will flourish.