The car buying process can be complex. Loans (and all things financing, really) can be complicated or confusing. Having a lot of questions is common.
Hopefully, after reading this post, you can stop spinning your wheels and move forward with confidence. We’re going to touch on popular topics like:
- Potential positives and negatives of getting a vehicle loan
- Does getting a car loan hurt your credit
- Will a new auto loan raise your credit score
- Why your credit score went up after car loan
- Can financing a car build credit
- How fast will a car loan raise my credit score
- Possible disadvantages of paying off a car loan early
We’ll round that off with some tips, tools, and resources to shift your car buying into turbo gear. Let’s get this show on the road!
Pros & Cons of Getting a Car Loan
No single way of paying for a vehicle is a one-size-fits-all slam dunk. Each person has their own needs, preferences, and constraints. As such, it’s worth examining some pluses and minuses to auto loans so you can determine what’s right for you.
Note that the “good” and “bad” we’re highlighting here are generalities — so take them with a grain of rock salt. Every combo of loan+lender+borrower is going to be its own unique scenario and should be evaluated on its specific merits before you sign on any dotted lines.
Benefits vs. Costs of Car Loans
Can make car ownership possible/easier
Can be expensive
Could broaden your car options
|Is a long-term financial obligation
Ends with you having a tangible asset
May be a rigid, unchangeable arrangement
May help you establish credit history
Might still need a down payment
Might improve your credit score
May require a cosigner
Might free up cash you could use otherwise
May require more paperwork
May enable you to keep your money in higher-yield investments
Possibility of loan default and loss of car for non-payment
Reduces and spreads out payments (so they may be more manageable)
Could end up with amount owed being greater than car’s value
May be able to deduct interest from taxes (business vehicles)
May take time to successfully go through the loan process
We recommend really taking some time to consider these factors in the context of your life and financial situation. Feel free to ask for help — that’s what Valley Credit Union is here for!
Car Loans & Credit Scores FAQ
Certain questions about auto financing and their impact on creditworthiness always top the list of trending car buying inquiries. Let’s have a look….
Does Getting a Car Loan Hurt Your Credit or Help It?
Shopping for a car loan won’t meaningfully impact your credit score. When potential lenders run a credit check as part of your loan application process, you may see a mini-dip of a few points.
Beyond that, though, it’s largely up to you. If you adhere to your loan agreement — as in making timely payments and repay the loan per your contract — a loan can improve your credit. However, break your promise to pay those loan installments and you can damage your credit.
How Does a Car Loan Help a Credit Score?
You’re showing that you can repeatedly meet your debt obligations over an extended time horizon. Having a strong credit legacy is great in and of itself. But, it’s also a predictor of the future likelihood that you’re a good credit risk. Altogether, this bolsters your credit score and puts you in a better position for your next foray into borrowing.
By taking on an auto loan, you may also be diversifying the kinds of debt you have. When you pay your loan per the terms of the lending agreement, you exhibit your ability to handle different kinds of credit. Prospective creditors view this favorably.
Can Financing a Car Build Credit if You Have No Credit History?
It may be more difficult or require some additional steps or guarantees to secure a loan if you have no credit baseline.
Once you get a loan, though, it can definitely help you get some credit-score traction. The key is to faithfully make those full monthly payments on time, every time. Doing so creates terrific fiscal habits that prove you’re responsible and able to manage debt.
How Fast Will a Car Loan Raise My Credit Score?
This depends on your personal credit background. Each person’s situation is a mix of distinct variables that influence credit score movement over time.
If you have consistently good credit, your score will nudge up eventually. Car loans aren’t a quick fix; they’re a long-game strategy.
Conversely, if you have bad credit or detracting actions on your credit report — it could take a while. For “lesser” infractions, it could take somewhere around three months to recover. Bigger issues, like bankruptcy or missing mortgage payments, could take years to recover from.
Is it Normal that Your Credit Score Went Up After a Car Loan?
It’s a little counterintuitive, but when you pay off your loan — your credit score may actually drop slightly at first. This dip is due to the way credit scores are calculated. FICO (the company that determines credit scores) uses an algorithm that prefers active lending accounts over closed ones.
Thankfully, if you stay on top of your credit obligations (e.g., credit card bills, mortgage, loans, etc.), your credit will rebound fairly soon. You’ve established a track record of fiscal responsibility — and lenders and credit rating agencies love that. The net effect is that your credit score may go up in the long run. Additionally, prospective creditors will see your lengthy history of on-time payments, which will reflect positively on you.
What Are The Disadvantages of Paying Off a Car Loan Early?
There are some other potential downsides to repaying your loan before the originally agreed-upon due date. Here’s the quick list:
- Temporarily lower credit score (discussed above)
- Opportunity cost — You might be forgoing using that cash for something that provides greater overall value in your financial or personal life.
- Penalties — Some loan agreements include early repayment fees.
Don’t let this scare you away from paying your loan back in less time, if it’s a prudent thing to do in your case.
Why You Should Get Your Car Loan from VCU
Working with a credit union on your car financing — whether it's a new loan or you’re refinancing — will yield so many benefits to you. Here are the biggest reasons why heading to a credit union, such as Valley Credit Union, instead of a traditional financial institution for your auto lending needs may be a smart move for you:
Plus, credit unions offer exclusive perks, like member dividends, and have a community focus. They’re in it for the people (you), not profits.
VCU, Making Car Buying Even Easier
The fundamental benefits of joining a credit union are substantial and attractive. As if they weren’t enough to entice you, VCU also offers some other resources that will come in handy as you’re going through the car-buying process.
From advising to pre-approval and refinancing to repayment, credit unions can make the vehicle financing process more accessible, understandable, and pleasant.
Valley Credit Union, Paving the Road to Financial Success
Does getting a car loan hurt your credit? No. Can financing a car build credit? Yes. Will getting a new auto loan from VCU raise your credit score faster and in a more manageable way? It’s highly likely.
This is because we offer you products and services designed for your needs. On top of that, we provide the tools, resources, and knowledge you require to make the best possible financial decisions for yourself.
We’re here to support you every step of the way, especially at the milestone moments in life. Contact us today to see how we can help you get that new car, strengthen your credit, and solidify your overall financial well-being.
About the Author
Justin Roberts, Vice President of Lending
Justin Roberts is our Vice President of Lending and has been in the financial industry for over 18 years. He is an Oregon State University Graduate and has just completed Western CUNA Management School. When he is not focused on helping the members at Valley, you will find him coaching his two sons and volunteering his time to help develop the youth in our communities through sports.