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How Does the Size of Your Auto Loan Impact Your Credit?

The amount of your auto loan will only affect a lender’s decision on any lines of credit that you apply for after obtaining the auto loan. Your credit score is affected mainly by how you pay the loan and how many times your score has been requested by a lender.

Debt to Income Ratio

To clarify, when deciding the fate of a loan application, lenders look at your income compared to the cash you currently have committed to other payments. This is called your debt-to-income ratio, or DTI.  Based on that, a small auto loan will only matter if you are close to the maximum credit a lender believes that you can reasonably afford.

Does Applying for a Car Loan Hurt Your Credit?

As for your credit score, each time your credit score is pulled by a lender, your score drops a few points. If you shop around for a loan in a short period of time, many lenders will overlook the drop. So, if the inquiries are grouped within say 30 days, you will be alright. Spread those inquiries out over several months and you look desperate for funds, your score will drop at least 50 points, and you risk being denied.

On-Time Payments Reign Supreme

The main way that a small auto loan will affect your credit score is how you repay the loan. A single late payment can undo years of on-time payments. Scores have been known to drop 100 points after one late payment. The higher your score is prior to the late payment, the more it will drop. Also, making on-time payments for at least 12 months will help your score more than paying the loan off in a shorter period of time.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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