Auto Loan Payments

How Auto Loan Payments Affect Your Credit Score


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Making your auto loan payments successfully is a great way to build your credit, but missing them can have terrible repercussions. All loans, including car loans, have a very strong influence on your credit score depending on how you pay them back. If you're curious about how your car loan affects your credit score and what happens if you default, this quick guide should give you some insight.

Getting a Loan Affects Credit

The mere act of taking out an auto loan will have implications on your credit score. Current loans outstanding have an effect on your credit, so taking an auto loan may temporarily drop your credit score only until it is repaid. On your credit history, which other lenders will check before deciding whether or not to give you a loan, lenders will be able to see that the drop in credit is due to a current loan oustanding. As long as you have sufficient income to cover that loan, and have not previously missed payments, you shouldn't have a problem finding other loans even with this small credit drop.

Building Credit with Loan Payments

Paying back an auto loan is a great way to restore bad credit or simply solidify preexisting good credit, while enjoying your new car. As long as you have the resources to repay your auto loan every month as agreed, your credit will see the benefits. As all terms and auto loans are different, it's not possible to say exactly how many points a payment will raise your credit. However, you can rest assured that making payments on installation plans like car loans does have a strong, positive effect on credit.

Paying your loan off in full will not give you an extra credit boost. If you pay your car loan off earlier than originally agreed, you will not get any additional good credit (but it's not a bad thing, either).

Dropping Credit by Skipping Payments

As making payments has a strong positive effect on credit, skipping them has an even stronger negative effect. Skipping payments completely is unacceptable, and will result in very big drops in your credit score. A payment is usually considered skipped if it is more than 60 days late. If you make a late payment that is not very late, it is possible that the lender will extend a grace period and will not make note of the late payment to the credit bureau, so your credit won't be affected. Don't despair if your payment is only about a week late, and call your lender to explain the circumstances.

What Happens if You Default

Defaulting on a loan is, in short, not something you want to do. It will ruin your credit and the record of your defaulting will appear on your credit history for the next 7 years - a long time to pay for one mistake. For more information about the consequences of defaulting on a car loan, click here.

There are a number of effects, both good and bad, that an auto loan can have on your credit score. By being well informed, you can make better decisions about loans and your credit.

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