Getting concerned about your overall credit score while applying for car finance is always on top of the mind. There are a few different types of car loan options. These include a personal loan, Hire Purchase (HP), and Personal Contract Purchase (PCP).

A personal loan for a car is a reasonably known term. It is available through banks, lenders, and other financial institutions. The loan amount, its terms, repayments, and interest rate vary depending upon the credit history of the borrower.

An HP is an agreement defining monthly payments for a fixed duration post payment of a deposit. The car doesn’t belong to the owner until the final repayment is complete and the borrower would require returning the car on missing repayments.

A PCP is a complex form of HP with monthly payments depending on the car’s depreciation value. It entails a fixed repayment duration and deposit; however, it may come with a balloon payment equating to a minimum future value of the vehicle.

Affect of Car Finance on the Credit Score

● Heightens Bad Credit

Primarily, most car financiers do either a soft or a stern check on the credit history of the borrower(s). A soft credit check done by companies, banks, or other lenders means looking at the overall credit report. It happens without an in-depth credit history analysis.

Borrowers that undergo soft credit checks have a chance of availing 100% guaranteed car finance. On the other hand, researches the entire credit report of the borrower. This type of credit score gets reported on the credit file.

As mentioned earlier, a continuous application or loan rejection from car financers in a short span can lead to more bad credit filings. However, it only happens with a hard credit check.

However, if lenders view your overall credit score and repayment history is positive, they may provide you with options to get the car. Some might even offer lower interest rates, longer durations, better repayment options, etc.  

Car finance seekers can improve their credit score by enrolling in the electoral roll and paying off a few small outstanding debts. Avoiding missing repayments of ongoing loans, and defaults on County Court Judgements (CCJs) would also help.

It might delay the dream of owning a car but may decrease debts and increase the chances of getting car finance approved with only one application. By doing so, it would also avoid heightening the overall bad credit. It would also convert the bad credit into a subtle or positive credit score.

● Diminishes Future Loan Options

If a car lender finds that the credit score is not up to the requirement and refuses the car loan, it may diminish it even further. Multiple rejections may escalate concerns among lenders and lower the future of car financing.

Moreover, continuous rejection from multiple lenders may drastically impact the credit score. It may hamper the chance of availing any other loans such as personal, home, etc. Furthermore, the total available lenders, financing company options, and banks may decrease because of bad credit. Therefore, the borrower should carefully apply for car financing.

● Improves Credit

Although any credit agreement application creates a negative impact on the credit rating; however, timely repayments can improve the score. Moreover, borrowers with bad credit have a lower chance of availing 100% guaranteed car finance.

But they do have options like personal loans, unsecured loans, HP, and conditional sale agreements. These can help to finance the vehicle based on the terms decided between the borrower and the lender (s).

Making repayments of these financing options can help to improve the credit rating of a bad creditor. Unfortunately, missing repayments can further hamper the credit score of the borrower. Also, if the loan is secured, then the borrower would require to return the vehicle to the owner.

Besides this, unsecured car loans come with high-interest rates. Therefore, making repayments can become difficult for the borrower. However, clearing existing small debts, getting a promotion, shifting to a company with a higher salary, availing of government assistance programs, etc. can prove helpful.

It can help to overcome debts, make timely repayments, and avail the benefit of a good credit rating for any future loans.

● Creation of a High Risk or Highly Suitable Borrower

As clear from the points mentioned above, car finance can either make a borrower a high risk or highly suitable applicant. It entirely depends upon timely repayments, credit history, the total number of car applications, etc.

Therefore, a borrower shouldn’t avail of car finance if it might heighten a lousy credit rating, and come with high interest or repayments. They should go for car leasing, which provides a car to an owner for a long-term duration. At the end of the term, the borrower returns the vehicle to the leasing company.