Finance

How Does Availing a Vehicle Loan Affect Your Credit Score

Most people’s bucket lists include owning an automobile. Buying a car, on the other hand, is a costly undertaking. As a result, the majority of automobile purchasers choose to take out car loans in order to realize their ambitions of having a car. A vehicle loan, often known as an auto loan, is a loan obtained from a bank or non-banking financial organization to fund the purchase of a new or used car.

New and used car loans are the two types of car loans available. A new car loan is for people who want to buy a brand new car, while a used car loan is for people who want to buy a used car. Both sorts of vehicle loans are about equally prevalent at the moment. An automobile loan, like any other loan, has distinct characteristics and terms and conditions. The main characteristics of a car loan, such as the tenure of the loan, the interest rate, the amount of the down payment, and the qualifying criteria, are the same for both types of loans, with minor differences. Your credit score is another important factor that affects your car loan application. 

Credit score

A credit score is a numerical representation of your creditworthiness based on a variety of financial activity-related criteria. The scale ranges from 300 to 900, with higher scores indicating greater creditworthiness. Payment history, amount owed, duration of credit history, credit mix, and new credit are all factors considered by credit bureaus like CIBIL.

How a vehicle loan affect your credit score

All of your credit-related behaviors can have an impact on your credit score. It begins with your credit application and continues until the last EMI is paid and the loan or credit card is promptly closed. Let’s take a look at how your credit actions in relation to a car loan can affect your credit score.

Hard inquiries

A vehicle loan is a large-ticket loan that may be extended beyond a year. Car loans are typically for three to seven years. When you apply for a car loan, the lender will conduct a hard inquiry with a credit bureau to determine your creditworthiness. If you want to apply for other loans and/or credit cards in the near future, one more Hard inquiry could harm your credit score.

Credit mix

The percentage of unsecured and secured loans in an individual’s credit portfolio is known as credit mix. Lenders and credit bureaus seek a healthy balance of secured and unsecured loans from borrowers. This indicates that a person is utilizing credit not simply to spend but also to invest in assets such as a home, a car, etc.

If you’ve only used personal loans or unsecured credit like credit cards in the past, a secured loan like a car loan could help you balance your credit mix and enhance your credit score.

Repayment history

One of the criteria that determines your credit score is your repayment history, which has a significant impact on your credit score. Your credit score will be improved if you pay your EMIs on time and successfully. For this you can use the help of vehicle loan calculator.

Prepayment

Prepayment is a good activity in the eyes of the credit bureau or lenders because you have saved money and decided to pay off the loan by prepaying the principal. You can contemplate paying off the car loan if you save money or receive a windfall gain in the form of a bonus or from other sources. Prepaying a loan has an impact on your credit score, just like other credit-related acts.

Closure of a car loan

Closing a car loan after it has been paid off on time should have no negative impact on your credit score. With a loan taken out of your account, though, you open yourself up to more lenders. However, if an account is closed in an improper way, such as a write-off or settlement, the credit score suffers.

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