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.