Car Loans: How Do They Affect Your Credit Score?

Jason SteeleUpdated October 31, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you took out a loan to buy your car, you may have thought a lot about your credit before you walked into the dealership or applied for financing with an outside lender. Now that you have your new ride (and loan), however, you may still have some credit concerns. Namely: How does a car loan affect your credit? Does it hurt your score? Does it help? The answer is that getting a car loan can initially cause a slight drop in your credit score. However, the overall effect will likely be positive, provided you make your payments on time. Here’s what you need to know about how a car loan affects your credit score.

Understanding Credit Scores

As you go through life and use various types of credit, your credit score can fluctuate. When FICO® (the credit scoring model used by most lenders) calculates scores, it considers these five aspects of your financial behavior.

Payment history (35%) Lenders want to know whether you've paid past credit accounts on time. This helps them determine how much risk they'll be taking on if they extend you credit. This is the most important factor in a FICO Score.
Amounts owed (30%) Having credit accounts and owing money on them does not necessarily give you a low score. However, if you are using a lot of your available credit, this may indicate that you are overextended, and at a higher risk of defaulting.
Length of credit history (15%) Having a longer credit history generally has a positive effect on scores. However, even if you haven’t been using credit for very long, you may still be able to have a high FICO Score, depending on the rest of your credit report.
New credit (10%) Research shows that people who open several credit accounts in a short amount of time represent a greater risk, especially if they don't have a long credit history.
Credit mix (10%) Having different types of credit, such as credit cards, retail accounts, and installment loans, can positively impact your credit. However, it's not necessary to have one of each.

What Are Car Loans?

There are different types of auto loans, but most are installment loans. This means you receive a lump sum of money upfront, then pay it back (plus interest) in regular, often monthly, installments. Until you fully repay the loan, the lender holds the title to the car and can repossess it if you fall behind on your payments.You can apply for a car loan at banks, credit unions, online lenders, and at the car dealership. Many car loans require a down payment, with the remaining purchase price representing the principal of the loan.As with other types of loans, those with higher credit scores can usually qualify for lower interest rates. There is no minimum required credit score for a car loan. Generally, though, you’ll need a score of 700 or above to qualify for the lowest rates. You can usually get a loan with 650 credit score. However, buyers with scores in the 650 to 699 range may need to pay interest rates that are double those offered to top-tier credit scores, while those with scores below 650 will typically pay even higher rates.Car loans last 24 to 48 months. Generally, the longer the loan term, the lower your monthly payments will be. However, a longer term means you’ll pay more interest overall.Recommended: The Fundamentals of Car Loans

Do Car Loans Affect Your Credit Score?

Yes, getting a new car loan can affect your credit. At first, the effect may be slightly negative. This is because getting the loan adds a hard inquiry to your credit report, which might temporarily shave a few points off your score. Also, once the car loan is finalized, it will increase your total debt load, which may also have a slight negative effect on your score.However, any slight decline should be remedied quickly if you make your first few payments on time, since payment history has the biggest impact on FICO scores.Recommended: What Type of Credit Is an Auto Loan?

Different Ways Car Loans Can Affect Your Credit Score

Here’s a look at the specific ways getting a car loan can impact your credit profile.

Hard Pulls

When you apply for any loan, you authorize the lender to make a hard inquiry into your credit reports. A single hard inquiry can have a slight, temporary drop in your score. Multiple inquiries for new loans in a short period of time, however, can be seen as a sign of potential financial distress. Fortunately, multiple inquiries for car loans within 14 days is usually counted as one inquiry, since it typically means that consumers are shopping for the best rate, not taking out multiple loans. This is also the case when you’re in the process of refinancing a car loan.

Soft Pulls

A soft pull happens when someone checks your credit report but you didn't submit a new application for credit. This can occur when you check your own credit, or a lender checks your credit to see if you qualify for a pre-approval offer. Soft inquiries aren't an indicator of greater risk and, thus, don't impact your credit scores.

Payment History

Making on-time payments on your car loan can have a significantly positive impact on your score, since payment history holds the most weight when credit bureaus calculate scores. If, on the other hand, you fail to make your payments on time, it can seriously hurt your credit score.

Credit Mix

If you don’t already have any installment-type loans (such as a mortgage or student loan), getting a car loan will diversify your credit mix, and this can positively impact your credit score.

Overall Credit Report

A car loan gives you an opportunity to improve your credit profile by making timely loan payments and proving your reliability and responsibility to the major credit bureaus. Any temporary reductions in your credit score (due to a hard inquiry and increase in overall debt) will dissipate with time. And, as you continue making timely payments on your loan, the potential for your credit rating to improve continually increases. Recommended: Debt-to-Income Ratio for Auto Loans Explained

The Takeaway

A car loan allows you to buy a car without having to wait until you’ve saved enough to pay for it upfront and in full. But it’s important to consider the ways that a car loan can affect your credit, especially if you think you may apply for other loans or lines of credit in the future.When you first receive a car loan, it may cause a temporary drop in your credit score, due to the hard credit pull. However, if you go on to make on-time payments over the life of the loan, it demonstrates your trustworthiness to creditors and can ultimately have a positive impact on your credit profile and score.

3 Tips for Refinancing a Car Loan

Refinancing your auto loan could lead to lower monthly car payments and more money in your budget. Lantern by SoFi can help you find the right auto refi loan for you.
Shortening the term of your auto loan may increase your monthly payments, but you’ll likely pay less in interest over the life of the loan.
You may have trouble refinancing the loan on a car that is worth less than what you owe. For more info, check out When Is the Right Time to Refinance a Car?

Photo credit: iStock/Antonio_Diaz

Frequently Asked Questions

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About the Author

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.

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