In our congested towns and cities, having a car is not only convenient but is also seen as a status symbol as well. Additionally, even though you may dislike using a car every day for commuting, owning a car feels like a necessity given the state of public transportation, particularly the last-mile connectivity concerns.
Like any other expensive item, a car is typically purchased through a vehicle loan from a bank or other financial organization. Your credit score also comes into play when a loan or credit issue emerges. You must be aware that getting authorized for credit of any kind requires having a credit score, and a good one at that.
What is a credit score?
Your creditworthiness is quantified by your credit score, which is calculated using several aspects of your credit activity. It goes from 300 to 900, with higher scores signifying greater creditworthiness.
Factors that affect your credit score
Your credit score is calculated using a variety of aspects of your credit behavior. Your credit score is mostly affected by the following:
- Regular Repayments on your Credit Accounts
- Number of Credit Accounts (If they are negative or positive)
- Credit Utilization Ratio
- Credit Mix
- Number of Hard Enquiries on your PAN
- Credit History
How can a car loan affect your credit score
Knowing what things can affect your credit score today will help you understand how getting a loan or credit card can affect it. Your credit score may be impacted by any actions you take with respect to credit. It begins with your credit application and continues through the last EMI payment and fast closure of the loan or credit card.
No matter the type of loan, each credit action has the potential to boost or lower your credit score. Let’s examine how various credit decisions you have made in relation to a car loan may impact your credit score.
Application for a car loan
Effect on hard inquiries
A large-scale loan that might last more than a year is an automobile loan. Car loans often have terms of three to seven years. In order to determine your creditworthiness when you apply for a car loan, the lender does a hard inquiry with a credit agency. A hard inquiry will be recorded against your PAN number while the bureau completes it. A further hard inquiry may be detrimental to your credit score if you intend to apply for other loans and/or credit cards soon.
Effect on the credit mix
The ratio of secured and unsecured loans in a person’s credit portfolio is known as the credit mix. Lenders and credit reporting agencies anticipate that a borrower will have a good mixture of secured and unsecured loans, indicating that the borrower is utilizing credit not only for discretionary spending but also for investing in assets like a home, automobile, or further qualification.
You might get assistance in this area by applying for a car loan since it is a secured loan. An auto loan, which is a secured loan, may help you balance your credit mix and raise your credit score if you have only used personal loans or unsecured credit like credit cards up to this point.
Effect on repayment history
Current debt repayment is a major factor in determining a person’s credit score. Your credit score is greatly impacted by your repayment history, one of the variables defining your credit score. Your credit score will increase if you pay off your car loan EMIs on time and successfully. On the other hand, your credit score is at risk if you don’t pay the EMIs back on time. Additionally, you can end up paying additional penalties and late payment fees. Use a vehicle loan EMI calculator to find the EMI.
Additionally, if you are unable to repay the loan and must contact the bank to have it written off or settled, this might have a significant negative impact on your credit score, which can take years to recover from.
Closure of car loan
After the loan has been quickly repaid, closing a car loan shouldn’t have any negative effects on your credit score. However, once you have a debt off your account, you become qualified for more loans. However, as we previously explained, the credit score suffers if an account is closed via shady practices like a write-off or settlement.
It could be wise for you to ask your lender for a loan closure certificate once the debt has been repaid. This will be helpful if you ever run into issues in the future.
