Car Loans and Credit: How They Can Affect Each Other

Car Loans and Credit: How They Can Affect Each Other
  • Opening Intro -

    Making a large purchase on credit is a complex event which can affect your finances in many different and sometimes confusing ways.

    It is always a good idea to make an attempt to understand how such a purchase works, what it can affect and how you can best prepare yourself to deal with both the expected and unexpected results.


The most important consideration in the entire process is how your credit score will be affected. Here are a few things to consider before going to a dealership and buying a car on credit.

Your Score before the Purchase

It goes without saying that a better credit score makes the process of buying car easier and less expensive. Borrowers with good scores can often obtain interest rates and loan terms that are much more favorable than those offered to the average car buyer. Among the various advantages is the possibility of pre-qualifying for a car loan. This means as a buyer, you can enter a deal with an exact idea of your upper limit on price, and you will know in advance what your payments will be.

If you can start the car buying process with a pre-qualified loan, it may dramatically decrease both the cost of the car and the cost of your loan.

Your Score after the Purchase

Any major purchase on credit will change your financial profile and therefore have an effect on your credit score. While this is unavoidable, there are steps you can take to minimize the negative impact and possibly even increase your score by making payments on time, paying the loan off early or re-financing the loan at some point to either reduce principal or interest rate or both.

What is most important is that you do not allow the purchase to negatively affect your score. Making your payments on time, paying the loan off as soon as possible and making sure your loan to income ratio stays manageable will help.


One thing to keep in mind is that while shopping for a car, numerous inquiries on your credit reports can negatively affect your score. For the most part, this won’t be permanent or penalize you in the long-term, but it could have an effect on your purchase if you choose to finance your vehicle a short time after you apply for multiple deals.


It should also be pointed out that any financed vehicle may have higher insurance costs than a vehicle you own. The finance company will insist that you carry collision and replacement insurance on the vehicle in the event it is stolen or damaged in an accident. During the time you are making payments, you have to remember the car technically belongs to the bank. You are required to protect their property until you have paid for it.

Purchases on credit require as much or more preparation than simple deals like paying cash. As always, you should take your time to look in to all your options before making any major decisions.

Financing reference:

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