When you take out a car loan in Australia, it’s important to understand how it will impact your credit report. Your credit report is a detailed record of your credit history, including loans, credit cards, payment behaviour, and any defaults or late payments. Car loans can have both positive and negative effects on your credit report, depending on how you manage them. Here's what you need to know about how car loans affect your credit.
- Credit Inquiry and Loan Approval
When you apply for a car loan, the lender will conduct a credit inquiry to assess your creditworthiness. This is known as a hard inquiry or hard credit check. While a single inquiry generally has a minor and temporary impact on your credit score, multiple hard inquiries within a short period can negatively affect your score. However, if you successfully secure a loan, it can help establish or improve your credit history if you manage it well.
- On-Time Payments and Positive Credit Impact
Making regular, on-time car loan repayments can have a positive effect on your credit report. Lenders report your payment history to credit reporting agencies, so each time you make a timely payment, it is recorded as a positive mark on your credit report. Over time, consistent on-time payments will improve your credit score, showing future lenders that you are a responsible borrower. Having a mix of different types of credit, such as a car loan, credit card, and personal loan, can also enhance your credit score by demonstrating that you can manage various credit accounts.
- Missed or Late Payments and Negative Impact
On the flip side, missed or late car loan payments can significantly damage your credit report and lower your credit score. Payment history is one of the most important factors affecting your credit score, accounting for approximately 35% of your overall score. If you miss a payment, it is typically reported to credit bureaus and can stay on your credit report for up to five years. If late payments become habitual, it can lead to a poor credit score, which may make it more difficult to secure future loans or result in higher interest rates.
- Default and Repossession
If you default on your car loan (i.e., fail to make payments for an extended period), the lender may initiate repossession of the vehicle. Repossession is a serious event that can severely damage your credit report and score. A repossession can remain on your credit report for up to seven years, making it harder to access new credit or loans. Additionally, if the sale of the repossessed car does not cover the full amount owed, you could be left with a deficiency balance, which will also be reported to the credit bureaus.
- Loan Payoff and Credit Score Boost
Once you fully pay off your car loan, it will have a lasting positive effect on your credit report. Paying off the loan shows lenders that you are capable of managing debt and fulfilling your financial obligations. This can boost your credit score and improve your chances of being approved for future loans with better terms and interest rates. However, closing a car loan account can also lower your overall credit score temporarily because your credit mix will change. The impact is usually minor and short-lived, and the benefits of paying off the loan far outweigh the temporary dip.
- Impact on Credit Utilisation
For individuals who have a high credit card balance, a car loan can lower your credit utilisation ratio, which is another factor that affects your credit score. By spreading out your credit usage across multiple types of credit (such as a car loan and a credit card), you reduce the amount of available credit you’re using, potentially boosting your credit score.
Conclusion
A car loan can both help and hurt your credit report, depending on how you manage it. Making timely payments and paying off the loan as agreed can improve your credit score, while missing payments, defaulting, or having your car repossessed can have long-lasting negative effects. By understanding how car loans impact your credit, you can make informed decisions that will benefit both your finances and your credit profile.
DISCLAIMER
The information provided on this website is general in nature only and has been prepared without considering your financial needs, circumstances and objectives and should NOT be construed as financial, taxation or legal advice. For more information, get in touch with our experienced partner brokers today.
