Will a Car Loan Hurt My Credit?

A new car loan, or any new loan for that matter, will negatively impact your credit score for a short period of time. Luckily, that short term drop in your score will reverse itself within 60 days. After 12  on-time payments, your score will increase above its pre-loan level.

The initial drop comes from two factors:

  • The loan approval process
  • The increase in your debt load.

The “Hard” Credit Inquiry

Each loan application triggers a hard pull of your credit report. Each hard pull lowers your score by a few points. The credit reporting agencies understand that you may want to shop for the best possible loan terms, so they will lump multiple pulls within a 30 day span, for the same purpose, into one, lowering your score slightly less. You may expect this to be a drop of up to 20 points.

The Increase in Debt Load

The second reason for an initial drop in your score is the increase in your debt load. It will appear as if you have less of an ability to repay any additional loans. This is an important aspect that lenders consider when offering installment loans(autos, mortgages).

The Credit Rebound

Your credit score will rebound steadily. After 30 days, the dip from the credit pulls will begin to fade. It will disappear completely after 60 days. The dip from your ability to repay will fade more slowly. It may take up to 12 months to disappear. How quickly it fades depends on how much you owe for debt repayment each month. Lenders want to see that you have less than thirty percent of your after-tax income committed to debt payments. They will severely penalize you for a higher percentage.

After you have made twelve on-time payments on your new loan, your credit score will start to reach levels higher than it was pre-loan. The increase will be more if this is your first installment loan, because ten percent of your credit score depends on you using different types of credit.