How Does A Car Loan Affect My Credit?
Car loans can bring many benefits for those who want to pay for a car over time. These loans often take several years to pay back and include a large amount of money. If you need a car soon, a loan may help you fulfill your needs. When you’re thinking about financing options for a new car, you may wonder about the impact it may have on your credit. 
What Do You Need to Know About Car Loans?
Let’s review the basic information about car loans, including what they are and how they work. A car loan is a large sum of money that you borrow from a lender to use to pay for a car upfront. You can drive your new car, but you also pay back the loan to the lending institution in small increments every month over time. The lender typically holds the title to the car until you fully repay the loan.
Most auto loans last around two to seven years. Taking out a loan with a longer term often lowers your payments each month. This may help some people buy a car that initially sits outside of their budget. Some used car models may also cost less and help you obtain a car loan with a lower amount.
The total price of an auto loan depends on many factors, including the interest rate, APR, term length, and if you include a down payment. Including a down payment usually helps you reduce the amount you pay each month throughout the loan term. An APR, or an annual percentage rate, consists of the lender’s interest rate and any additional charges they may require. The amount you borrow from the lender usually includes the APR percentage.
If you have a great credit score, you may qualify for lower interest rates. If your credit score is less than amazing, you may have to pay a higher rate. Someone with low credit may also require the assistance of a cosigner, such as a family member, to help them obtain the auto loan.
How Do Car Loans Affect Your Credit Score?
Before you can take out a loan, you fill out a loan application. Lenders then typically perform a credit check, which adds a hard inquiry to your credit report. This may reduce your score by five to 10 points, though the reduction typically lasts around only a year. If you add more than one hard inquiry in a short period of time for other large purchases, like a house, it might negatively affect your loan eligibility. Soft inquiries usually don’t affect your credit score. These typically involve personal research without a lender or through a lender with marketing intentions.
Obtaining a car loan may affect your credit in two ways. It may temporarily lower your score by adding a hard inquiry to your credit report, or it may improve your credit score slightly by adding to your credit history. Your credit score may improve only if your credit history shows that you make payments on time, every time. If you continuously pay your loan on time every month, you may increase your credit score by more points than you lost when initially adding a hard inquiry.
A car loan may affect your credit in different ways depending on your FICO score. Your FICO score combines an analysis of your payment history, credit utilization, length of credit history, new credit, and credit mix. Taking these elements into account, a car loan will first increase your total debt load and change your credit utilization ratio. This may slightly drop your score. Quickly repaying your first few payments usually fixes this.
Your credit mix may improve after a car loan if you have no installment-type account on your report before receiving the loan. Your credit utilization is typically unaffected by a car loan. This is the amount of debt you carry over from month to month in comparison to your credit limit.
Does Paying Off Your Loan Hurt Your Credit?
Paying off your loan often doesn’t negatively affect your credit score, but this depends on your personal FICO score and credit history. As you continue to pay off your car loan over time, this typically makes your credit utilization score go down, which may improve your credit overall. One way to improve your score as you pay off your loan is repeatedly making on-time payments. This is good for your payment history.
If you want to pay off your loan early, this may help you save on interest fees. However, verify that your specific loan agreement doesn’t penalize you for this. If it does, keeping a longer loan term with regular on-time payments may help you maintain or improve your overall score. Keeping multiple types of credit lines open typically helps you establish a great payment history.
In contrast, you may benefit from verifying your eligibility for a loan extension if you find yourself struggling to make payments. This could provide you with temporary relief.
Visit South Park Nissan for Your Financing Needs
If you’re considering financing options for your next vehicle, we’d love to help you achieve the car of your dreams through our fair and easy financing department. Fill out a financing application online to learn more about our terms and requirements. We offer competitive rates and terms on our inventory of new and pre-owned vehicles in the San Antonio, Pleasanton, Castroville, Floresville, and Boerne areas. If you have questions or concerns, you can also talk to one of our finance experts. We’ll guide you through the loan process to help you get the car you want and need.
Visit our San Antonio location today at 8606 I-35 South – San Antonio, TX 78211 to see our inventory for yourself. You can even schedule a test drive and speak personally with one of our sales experts to discuss any questions or concerns you have about our Nissan models. Contact us online by filling out an online form or calling our sales department at (210) 985-7965. If your Nissan model requires maintenance, we also offer exceptional car service with trained technicians and certified Nissan parts. Schedule your routine maintenance today and feel the difference that excellent service can make.