Bad Credit Car Finance
How does buying a car affect your credit score?
From the application itself to how well you pay off your loan, car finance can affect your credit score. If you’re concerned about the impact car finance can have on your credit score, we’ve covered what you need to be aware of.
Does car finance affect credit score?
Yes, applying for Zuto HP finance or PCP with bad credit will impact your credit score. It can have both a positive and a negative impact, depending on a few different factors. The length of time your credit score will be affected can also differ, so it’s important to understand these factors before applying for car finance.
For example, you may see a temporary drop in your credit rating when you first apply for a loan, while missed payments can leave a long-lasting mark on your credit file.
Here are some of the ways car finance can reduce your credit score.
When you apply for a car loan, lenders will make what’s known as a ‘hard search’ on your credit report. Too many hard searches in a short space of time (whether for car finance or other loans or finance products) can be seen as a negative by lenders.
A hard search will stay on your credit file for two years. When you apply for car finance – or any other loan – you may see your credit score drop slightly. However, paying back your credit on time will improve your score.
At Zuto, we understand that a hard search can be a concern for some drivers, so at first we only perform a soft search. This won’t impact your credit score at all; it doesn’t show up on your account and won’t be visible to lenders.
Only if your initial application has been approved, and you’re happy to proceed, do we perform a hard search to confirm your eligibility for a loan.
Like any finance product, if you miss payments on your car finance agreement, this can also negatively impact your credit score.
You may be offered a grace period in which you can make your payment (and may be charged a late fee.) If you don’t pay within this timeframe, your lender can report you as delinquent, damaging your credit score.
Delinquency will stay on your credit report for seven years.
Defaulting on your loan
‘Defaulting’ means failure to repay your debts. If you don’t repay your loan after being declared delinquent, the next step is for your lender to declare your loan in default.
The time period for this may vary between lenders, but in general, it is between 30-90 days of the missed payment.
When your loan is in default, you will be contacted by debt collectors. Failure to pay may result in your car being possessed.
Defaulting on a loan and repossession will also both remain as separate marks on your credit report for seven years.
Does car finance improve credit score?
Now you know how car finance can negatively impact your credit score, let’s look at the positive impact it can have.
Does car financing build credit? The answer is yes, it can do, if you’re responsible and reliable with your repayments. Here are a couple of factors that can improve your score.
Paying your loan back on time and in full
If you pay your car finance loan on time and in full each month, over time, this can improve your credit score. Payment history is one of the biggest factors of a credit score. Repaying your loans on time shows prospective lenders you are trustworthy.
Showing a credit mix
A ‘credit mix’ refers to different types of loans you have. There are two types of credit: instalment and revolving.
Instalment credit refers to a loan with a fixed end date and monthly repayments. A car loan is therefore considered instalment credit.
Revolving credit refers to a loan with a minimum monthly repayment but no set balance or end date. A credit card is an example of revolving credit.
It’s favourable to have a combination of both instalment credit and revolving credit because this shows lenders you can manage different types of credit. Adding instalment credit to your file can therefore help boost your credit rating.
Does car finance affect mortgage application?
Yes, car finance can affect your mortgage. Car finance is technically a debt, so this is something banks and mortgage lenders will look at when assessing your application.
Mortgage lenders will look at your income vs outgoings, including your debt repayments. They’ll also look at your debt-to-income ratio, which shows what percentage of your salary goes on paying off your current debts.
If you’re paying a large amount for a car loan each month, this may make mortgage lenders reduce the amount they’re willing to offer you.
You can reduce the impact your car finance will have on your mortgage by paying off your car loan before applying - paying it off could improve your chances of being approved for the mortgage amount you require.
Now you know how car finance impacts your credit score, you can make an informed decision about whether the timing is right for you.