Does Car Finance affect your Credit?


Car finance can be useful if you don’t have a lump sum available to buy a new car. With a range of loans available, there is an option suitable for everyone – there is even car finance for bad credit if you’ve struggled to be approved for finance in the past, but can it affect your overall credit? If you’ve built up good credit, or your score is not as high as you’d hoped, read on to find out how car finance could impact your finances, as well as a few tips on how you can put yourself in the best position to be approved.


What do we mean by car finance?

Car finance is a way of receiving funds to help you buy a new or used car. There are various options available that allow you to either purchase the car or lease it for a certain period, buy it when the contract is up or change your car for a newer model. Here are a few of the most popular ways of financing a car that may be offered to you.

  • Car loans: This type of finance means you take out a loan to buy the car you’re interested in. You can choose a loan that fits the amount and time in which you will be borrowing it, and the money will appear in your account when the loan is approved to buy the car. You then pay this loan off in instalments to the lender.
  • PCP: A personal contract purchase means you must pay a small deposit towards your car, then take out a loan to cover the rest. You then make monthly payments back to the lender over a certain term. At the end of the contract, you can take out a new plan on a new car, make a final payment so that the car is yours, or give it back and walk away.
  • Hire purchase: This type of finance means that you make monthly payments to hire a car. You will be asked to put down a deposit of around 10%, but the larger the amount you put down, the better the repayment terms will be. Once you’ve made your payments the car is yours.


Can car finance affect your credit?

When choosing to take out a car finance loan that is best suited to you, you will need to consider other loans that you may have to pay back too. When choosing a finance plan, you should make sure that it fits your budget, as failing to make repayments can result in bad credit. Consider the payments you have to make each month and subtract them from your income. This will help you to find out how much you can afford to pay for car finance realistically so that you can ensure you meet your repayments on time and in full. Below, we’ll look at a few factors that can have an impact on your overall credit.



Taking out car finance can impact your credit if you regularly miss repayments. Making repayments on time and in full will be reflected in your credit score. If you frequently miss repayments of your car finance and you’re looking to apply for other types of finance in the future, your credit score will have been negatively affected, and therefore you’re less likely to be approved.

If you already have various debts to pay off and you’re looking to take out finance on a new car, it is essential that you do your research before you enter a contract or deal with a lender so that you know how much you can afford. If you choose an option that means you won’t be able to make repayments, you should think twice before entering the agreement.



Car finance technically counts as debt and unfortunately, if you apply for financial help in the future, like securing a loan, this may hinder your chances. It all depends on how high your car finance monthly payments are, for example, if you are paying a high amount, your lender may not think it is wise for you to take on another loan of high value. If your car finance repayments are low, you may stand a better chance of securing a loan. But other factors such as credit card debt can also impede a lender’s decision. If you’re looking at buying a car when you already have debt repayments to make, your lender may decline your finance application, as you may not be able to afford to make both repayments.  


Tips and tricks for maintaining good credit with car finance

Getting approved for car finance can seem tricky especially if you have bad credit, however, you can give yourself the best chance at succeeding by following the tips below.


Be realistic

If you’re applying for finance, as previously mentioned, it is important that you can make the payments each month. When choosing a type of car finance, you should make sure that first and foremost, you can afford it. Be realistic with the car and loan option that you choose – if you know the car is too expensive, be sensible and choose something a little more affordable. Make sure that you know you can pay for it, to keep your credit score healthy.


Say no if you can’t afford it

If you find yourself in a situation where you’ve chosen a car and it turns out, you don’t think you can comfortably meet the repayments, you should rethink your decision. Only you know your finances, and no matter what the salesperson tells you is a good deal, if you think you can’t easily afford the payments, say no, or ask for help finding something more affordable. Choosing car finance that you can’t truly afford will only have a negative impact on your credit score and hinder your chances for finance approval in the future.


Check interest rates

Interest rates and APRs can be applied to car finance, and if you think you’ve found a good deal, you should also double-check if it includes interest. Sneaky hidden fees can sometimes catch you off guard, so making sure everything is included in your finance deal will allow you to get a better idea of whether car finance is the right decision for you.