Many people know that your ability to get accepted for car finance can depend on your credit score. But how does car finance impact your credit score? If you get declined for car finance, does your credit score take a hit? Almost all types of personal finance will require you to provide a credit check to see where you fall on the credit scale and getting car finance is no different.
A recent survey from Refused Car Finance found that nearly 80% of their customers surveyed thought that applying for finance has a negative impact on your credit score! Is this true or is it a common misconception? Let’s find out.
Why do car finance lenders check your credit score?
Potential finance lenders want to know what kind of borrower you are and if you can be trusted to pay back your finance agreement. Your credit file and credit score are a great indicator of this. Your credit score can be found on your credit file and is a numerical expression which represents your creditworthiness.
The general rule of thumb is that having a good credit score can mean you’re more likely to get accepted for finance and also receive better rates and lower monthly payments. In terms of car finance there are two main factors which can affect your credit score such as the number of applications and your ability to make repayments.
Does applying for car finance harm your credit score?
Much to contradictory belief, many people think that even just applying for car finance affects your credit score. This can be true if you use multiple hard search applications in a short space of time. A hard search credit check is when a lender takes a full look at your credit report and your credit score. This type of credit check is recorded on your credit file and making multiple applications for finance in a short space of time can negatively impact your credit score. It can also harm your credit score if you keep getting rejected for finance.
A soft search credit check, which is more commonly used by car finance brokers and many lenders, doesn’t have an impact on your credit score. Lenders use a soft search check to take a quick look at your credit report and it doesn’t leave a footprint ton your credit file. If you are shopping around for finance but don’t want to make multiple applications for finance, you could consider using a car finance broker to help sort your finance for you. You would just apply online once and then a car finance broker can help you get matched up with the most suitable lender from a wide lending panel offering multiple finance packages.
Does having a car finance agreement in place affect your credit score?
Ok, you’ve passed the credit check and you’ve got your car finance deal – great! But you may be wondering what affect car finance has on your credit rating. Car finance can be used to help increase your credit score. Building your credit score is all about showing you can be trusted to make your repayments and also physical evidence that you can. Paying your car finance back each month and in full can help to raise your credit score.
If you repeatedly miss your repayment deadline for car finance, your credit score can take a hit. If you don’t stick to the terms of your finance agreement, the lender could take further action against you such as defaults and County Court Judgements. Having these on your credit file can seriously affect your chances of getting accepted for bad credit car finance in the sure.
Depending on which type of car finance agreement you have, the lender can also have the right to take the car off you if you fail to meet the repayment deadline. When applying for finance you should make sure that you only apply for loans which you can be sure you can pay back and meet your repayment schedule each month.