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Do Car Loans Hurt Your Credit?

Yes, taking on a car loan will, in most cases, lower your credit score – at least in the short term. The reason for this is simple since taking on a monthly payment of, say, $300 over the next 60 months will make it harder for a person to pay off other debt. The higher your debt-to-income (DTI) ratio is, the worse your credit score will be.  This accounts for 30% of your credit score. That being said, paying off your loan will on time, as agreed, will gradually improve your credit. This is because your are establishing a new history of timely debt repayments. In fact, a “paid-as-agreed” auto loan is one of the most effective ways to build a positive credit history. After all, your history of payments accounts for 35% of your overall score.

For consumers with high incomes and low debt-to-income ratios, taking on a new car loan is not much of a credit concern, simply because the new payment may not have much of an impact on one’s debt-to-income ratio. In these cases, the credit impact of the new loan is negligible. For more on how car loans can help your credit, go here.

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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