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Zuto is a credit broker, not a lender. Our rates start from 8.9% APR. The rate you are offered will depend on your individual circumstances. Representative Example: Borrowing £9,000 over 60 months with a representative APR of 20.9% the amount payable would be £234 a month, with a total cost of credit of £5,047 and a total amount payable of £14,047.

Zuto Limited. Registered in England under number 05722976. Registered office: Winterton House, Winterton Way, Macclesfield, Cheshire SK11 0LP. Zuto Limited is acting as a broker and not as a lender. Authorised and regulated by the Financial Conduct Authority, registration number 452589. Zuto can introduce you to a limited number of finance providers, based on your credit rating, Zuto won't charge you anything for this service, but do get a fee from the lender which varies based on the product or amount borrowed.

Does a car loan build credit?

It’s difficult not to be concerned about your credit rating, as it can have a huge impact on your future chances of borrowing money. Better mortgage deals, loans and car finance packages are offered to those with a higher credit rating, so you may be wondering about the effect of car finance on this. So, does a car loan build credit or have a negative impact?

In the short term, applying for any credit agreement (including a car loan) can have a negative impact on your credit rating. However, if you make your payments on time, having a vehicle loan can help you to build your credit score over the long term.

Applying for a car loan

Choosing finance

The first stage of the process is selecting appropriate finance. Once you have found a finance package that will suit you, then next step is to apply.

Finance applications

The very process of applying for car credit may have an impact on your credit score - even before you sign up to any kind of deal. This is because multiple applications for finance can have a negative impact on your credit rating.

This can be avoided by minimising the number of applications you make. Apply for your preferred deal first, and only make your way down the shortlist if this is not successful.

The other thing you can do is check before you apply whether a ‘soft’ or ‘hard’ credit check applies, as each affects your credit score differently.

Hard vs soft checks

Soft credit check

Companies can take a look at just some of the information on your credit report. They do this to see how likely a successful application would be, without checking your entire credit history.

Hard credit check

If the company searches your entire credit report, this is known as a hard credit check. These are noted on your file, and too many in a short time frame can lower your credit score. This can reduce your chances of obtaining credit for around six months.

The effect of hard credit checks

Hard credit checks are therefore best avoided. If your report shows a lot of these checks over a short time period, lenders might assume you are in financial trouble and will thus see you as high risk. This means they might refuse your application, or only offer you packages with higher interest rates.

Repaying the car finance

Assume you’ve secured your car finance. Next, you need to make the repayments. How things go from this point can determine whether you build up a good credit rating - or reduce your credit score and therefore your chances of getting good deals on borrowing in the future.

Regular payments

The best way to ensure you help, rather than harm, your credit score is to make your payments every month on time and in full. If you do this, then borrowing money to buy a car can help to improve your chances of borrowing more money at good interest rates in the future. This is why taking out a car loan or other types of finance can actually help you secure mortgages and other loans later on.

If you default

If you do not make the repayments, then you are breaking the terms of the agreement. This applies whether you take out a secured or unsecured loan, personal contract plan, hire purchase or conditional sale agreement. Unless you have an unsecured loan, your car is at risk of being repossessed if you do not pay the agreed monthly amounts. If you have an unsecured loan, the lender can take you to court in an attempt to get their money.

No matter what kind of car finance or loan you have, failure to make payments will have a negative impact on your credit score - and seriously hamper your chances of future borrowing.

The bottom line

If you pay on time and in full every month, taking out a car loan will build your credit score. If you fail to pay, then this will have the opposite effect and may harm your chances of obtaining credit from then on.

Other related FAQs

Looking for more related content to this? We’ve picked a selection of related topics that you may find helpful

There is no specific minimum credit score needed to finance a car. While your credit score is one factor – lenders will consider a number of different pieces of information; including affordability and the type of vehicle you’re buying.

It is not possible to get car finance in the 12 months after being declared bankrupt or until your bankruptcy is discharged through the courts. Getting finance without declaring that your bankrupt is against the law – and could lead to an extension of your bankruptcy.

In order to get car finance with a CCJ, you will need to change the status of your judgement on the record or have it removed.

If you’re refused car finance, find out why. You may need to correct inaccuracies in your credit report or take steps to improve your credit score. You might also want to consider using a guarantor.

If you make numerous applications for car finance, repeated credit checks can impact your score negatively. Your approach to paying back the loan will decide longer-term credit score effects – but if you pay on time, it could well go up.

Both Equifax and Experian are credit referencing agencies. They use slightly different scales to present your credit rating – but both can provide lenders with some of the information they need to decide whether they’re willing to provide you with car finance.

Your access to agreements may be more limited, but it is possible to get car finance with a poor credit history.

It is possible to get car finance with a default, but it may be more difficult to do so than if you had a good to excellent credit score.

It may be possible to get car finance if you have an Individual Voluntary Arrangement (IVA) currently in place. To do so, you’ll need to seek the permission of the Insolvency Practitioner dealing with your case.

If you apply for car finance shortly before applying for a mortgage, this can affect your mortgage price. However, if you have a mortgage in place already, it will have no impact.