How a Car Loan Can Help Rebuild Your Credit Score

Your credit rating significantly impacts your future chances of borrowing money. Those with a higher credit rating have better opportunities for getting the best mortgage deals, loans and car finance packages. So what happens to your credit rating when you get out car finance? 

While applying for any credit agreement may negatively impact your credit rating, making your payments on time will boost your credit score in the long run. 

Here we take a look at the ins and outs of car loans and how they can help rebuild your credit score: 

Choose car finance that is suitable to your circumstances

Before you do anything, finding the best car finance to suit your lifestyle should be your first port of call. 

Take a look at personal loans, personal contract purchase (PCP), hire purchase (HP) and leasing options. With most car finance deals, you can expect a range of flexibility. Plus, once you’ve paid your deposit (typically 10% with a PCP or HP loan), you can expect to repay your loan in low fixed payments. 

For anyone experiencing multiple rejections or have a poor credit score, bad credit car finance deals are available. 

But, here’s the catch: you want to avoid applying for too many loans all at once. The very process of applying for car credit may impact your credit score before you’ve even signed up for a deal. 

Multiple finance applications are more likely to have a negative impact on your credit score than if you keep your applications down to a minimum. So make a shortlist of the best finance options around before you apply. Make sure you apply for your preferred deal first and then move on to the others on your list if you’re not successful.

Soft vs hard checks

Soft and hard checks can each affect your credit score differently, so it’s worth knowing the difference ahead of applying. 

Soft credit checks 

This is a simple way for companies to link your personal information to your credit report. But rather than looking extensively at the ins and outs of your credit file, it’s a quick measure to determine how successful your application would be without looking at your entire credit history. 

Hard credit checks 

Unlike a soft credit check, companies can search your entire credit report with a hard credit check. These leave a mark on your file that other companies can view. 

Too many on your account in a short space of time can lower your credit score and raise a red flag to other lenders. They will likely think that you are less creditworthy and not very good at handling your finances. As a result, lenders nay assume you are in financial trouble and mark you as a high-risk application. 

A hard credit check can also reduce your chances of obtaining credit for up to six months. So think before you click!

The power of repayments 

The deal’s been set, and you’ve secured your car finance. Now you need to focus on making your repayments on time. How you do this will determine whether you build up a good credit rating or reduce your chances of getting good borrowing deals in the future. 

In short, the health of your credit score relies on you making your payments on time and in full. As long as you stick to this principle, borrowing money to buy your new car will help to improve your chances of getting reasonable rates when you borrow more money in the future. 

Everything from securing a mortgage to being accepted for a furniture loan in the future will be helped by how you manage your monthly car loan repayments. 

What happens if you default?

When you sign up for car finance, you must agree to terms and conditions, and one of these is making your repayments on time. No matter if you take out a secured or unsecured loan, PCP, HP or a conditional sale agreement, this rule applies. 

If you don’t pay the agreed monthly amounts, your car is at risk of being repossessed if you a secured loan against the vehicle itself. With an unsecured loan, the lender could take you to court to settle the amount of money owed and more. 

At the end of the day, regardless of what type of car finance deal you sign up for, if you can’t make the agreed payments on time, it will harm your credit score. And your chances of successfully borrowing in the future will be seriously hampered. You’ll either get rejected multiple times or only be offered high APR loans. 

Simple ways to improve your credit score ahead of application 

How can you give yourself the best chance of success ahead of the application stage? 

Well first, you need to have a look at your credit report across multiple agencies, from Experian to TransUnion. The information they each hold may differ as they contain data from different credit agencies, so look at all of them. 

After, make sure you do the following:

• Check for mistakes: Are all your outgoings accounted for? Are there any typos in your personal information or payments that you’re unaware of? Contact your bank with any of your concerns or speak to the lender directly so they can make sure any mistakes are made right

• Check your address: Any time you move home, update this information with the electoral role and on any of your accounts. Councils send updated data to credit reference agencies once a month

• Make sure you are paying all your bills on time: Again, this is the best way to show lenders how well you manage your finances 

• Break negative financial links: If you have a joint account with someone with a poor credit score, chances are it will impact your report negatively too. Once you’ve removed your name from these accounts, your score can improve within a month

Opting for a car loan makes your next motor more affordable and can rebuild your credit score when managed well. With more loan options than ever before, you have more flexibility to play around with. What type of car finance deal will you go for?