A recent customer survey from Refused Car Finance has revealed that 80% of customers think that car finance negatively impacts your credit score. Refused Car finance specialise in car finance bad credit and their customers tend to be those with low or no credit score. Consumers shouldn’t let this misconception stop you from getting a car on finance and there are a number of ways in which getting a car finance can help your credit score too! Let’s take a look at the impact car finance can have on your credit score.
Does car finance negatively affect your credit score?
Applying for finance
When you apply for a car on finance, you will usually be asked to pass a credit check. A credit check enables lenders to see your history of borrowing and also meeting any repayment deadlines. If you’ve had trouble in the past meeting repayments, you may find yourself with a low credit score. Car finance can only harm your credit score if you make several applications for finance in a short space of time. Hard search credit checks are recorded on your credit file and multiple hard searches can harm your credit score. This is because it can indicate to lenders that you are desperate for credit and keep getting declined. If you want to shop around for the best deal, you should stick to soft search applications only. These do not influence your score and don’t leave a mark on your file.
During your agreement
Car finance can only have a negative impact on your credit score if you don’t stick to the rules of your car finance agreement. When you take out finance, you will agree to make your monthly repayments on time and in full. Failing to do so can lead to a low credit score, defaults on your credit file and County Court Judgements (CCJs), all of which have a serious impact on getting finance in the future. Missed or late payments are one of the most influential factors on your credit score. If your car finance agreement is a secured loan this means that the loan is secured against the vehicle and the lender has the right to take the car away from you if you fail to repay.
Can car finance improve your credit score?
Make payments on time and in full
Using your car finance agreement properly can actually help to increase your credit score. Finance lenders like to see a solid history of making repayments on time and in full and using your car loan for this can be really beneficial! Many people who have a low credit score may be offered a higher interest rate at the beginning of the agreement, but this could be lowered by making payments on time. Having a better credit score can help all aspects of your financial life too.
Better refinancing options
When you apply for finance with a low credit score and use your loan to increase your credit score, you can get access to better refinance rates. Refinancing is when you replace your current car loan with a new loan that usually has better rates. You could choose to refinance your current agreement when you are halfway through your current agreement. Having a better credit score throughout this period can give you access to lower interest rates, lower monthly payments, shorten or lengthen your loan term and improve relations with your current lender. If you have a PCP agreement in place, you can also choose to refinance balloon payment so you can keep the car you currently have! PCP deals require a large lump sum at the end of the agreement, which many people can’t afford to pay upfront.
Car finance shouldn’t harm your credit score, if you use it in the right way. Making your payments on time and keeping on top of your debts or loans can have a positive impact on your credit rating!