Can Car Finance Build Credit Score?

Car finance allows you to drive away in a new car without a large down payment, spreading the cost through manageable loans or leases. But how does car finance impact your credit score? Can it actually help build it?

Absolutely! Car finance can help build your credit score, but responsible management is essential. This guide will explore car finance, its impact on your credit score, and the benefits and drawbacks to consider.

Considering car finance but worried about your credit score? Check your eligibility for a range of finance options with Bad Credit Motor Finance in just 60 seconds, with no impact on your credit.

How Car Finance Affects Your Credit Score

Taking out a car loan can significantly impact your credit score, both positively and negatively. Understanding these effects is crucial for making informed financial decisions.

Understanding Credit Reports

Your credit report tracks your credit history and plays a vital role in determining your creditworthiness. It includes details like current and past credit accounts, payment history, and credit inquiries. Car finance adds an instalment loan account to your report and tracks your payment history on that account.

Building Credit with Car Finance

  • On-time Payments: Making timely payments on your car loan is the key to building a positive credit score with car finance. Consistent on-time payments establishes a positive payment history, demonstrating responsible credit management to credit bureaus.
  • Length of Credit History: Car loans typically last for several years. Maintaining a long-term credit line with on-time payments can positively impact your credit score. This shows lenders your ability to handle credit responsibly over an extended period.
  • Credit Mix: A healthy mix of credit types can improve your credit score. Car finance adds instalment loans to your credit mix, potentially boosting your score if you already have revolving credit like credit cards.

Potential Credit Drawbacks of Car Finance

  • Missed Payments: Missed payments, even a single one, can severely damage your credit score. Payment history is the most significant factor, and late payments have a long-lasting negative impact.
  • Multiple Loan Applications: Applying for multiple car loans within a short period can also hurt your credit score. Each application triggers a “hard inquiry” on your credit report. Too many inquiries can signal to lenders that you’re struggling financially or taking on too much debt, potentially lowering your score.
  • Repossession: If you default on your car loan and the car is repossessed, it will be reported on your credit report and severely damage your credit score for several years. This can make it difficult to obtain future loans for cars, houses, or even basic necessities.

Car Finance Options for Bad Credit

If you have bad credit and traditional lenders have rejected you, there might still be hope! Soft search car loans are an alternative option that may suit your needs. These lenders use alternative methods to evaluate your creditworthiness, minimising the impact on your credit report.

Compare car finance options in 60 seconds with Bad Credit Motor Finance’s no-obligation, soft search quote.

Choosing the Right Car Finance

The best car finance option goes beyond affordability. Understanding how each option impacts your credit score is crucial for responsible borrowing. Here’s a breakdown of two popular choices:

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) lets you spread the cost of a car with lower monthly payments but requires a final payment to own it.


  • Lower monthly payments (to Hire Purchase)
  • Upfront deposit
  • Fixed monthly payments over a set term
  • Flexible end of term options: pay final balloon payment to own vehicle, exchange vehicle, or return it

Credit Impact

  • Hard inquiry on application
  • On-time payments build credit score positively, similar to instalment loans

Hire Purchase (HP)

Hire Purchase (HP) is a car finance option where you own the car outright after making a down payment and all monthly instalments.


  • Higher monthly payments (to Personal Contract Purchase)
  • Upfront deposit
  • Fixed monthly payments over a set term
  • Own the car outright after the payments

Credit Impact

  • Hard inquiry on application
  • Consistent repayments builds credit score positively
  • Owning the car at the end may be viewed slightly more favourably by lenders compared to PCP

Remember: Responsible management is key! Regardless of the option you choose, timely payments and staying within your budget are crucial for maintaining or improving your credit score.

By educating yourself on car finance options and their credit score impact, you can make informed decisions and potentially improve your credit profile while acquiring the car you desire.

Ready to take control of your finances? Get a head start on building a healthy credit score with a responsible car finance plan from Bad Credit Motor Finance. Apply for a free, no-obligation quote today!

FAQs About Car Finance and Credit Scores

Can I Get Car Finance with Bad Credit?

Yes, but the terms and interest rates might be less favourable. Explore and compare offers to find the best option for your situation.

How Long Does It Take for a Car Loan to Improve Credit Score?

It depends on your current credit and how you manage the loan. You may see positive effects within a few months of on-time payments, but significant improvement takes time and consistent responsible credit management.

What Happens If I Can’t Make My Car Finance Payments?

Contact your lender immediately! Ignoring payments can lead to late fees, penalties, and repossession. Some lenders offer solutions like deferment or loan restructuring to help during financial difficulties.

Can a Car Loan Hurt My Credit Score?

Paying off a car loan can initially cause a slight drop due to closing an account, reducing credit mix diversity. However, the positive payment history outweighs this in the long run. Overall, paying off a car loan is generally viewed positively by lenders.

Should I Put a Large Down Payment on a Car to Improve Credit?

A larger down payment reduces the loan amount and payments, but it doesn’t directly impact your credit score. However, it can make the loan more attractive to lenders, especially with marginal credit.