Learn how car loans impact your credit score, improve financial health, and the key factors that influence loan approvals and terms.
Published Date:
Jun 9, 2025
Last Updated:
Car Loans and Credit Scores: What to Know
Car loans can help or hurt your credit - here’s how to make them work for you.
When you take out a car loan, it impacts your credit score in several ways:
On-time payments (35% of your FICO score) boost your credit.
Credit mix (10% of your score) improves by adding an installment loan.
Applying for a loan causes a temporary dip due to a hard inquiry.
Your credit score also affects your loan terms. Borrowers with higher scores get better interest rates. For example:
Super Prime (781–850): 4.77% APR for new cars.
Deep Subprime (300–500): 15.75% APR for new cars.
Late payments or defaults can damage your credit and lead to repossession. To avoid risks:
Choose a loan with payments you can afford.
Set up automatic payments or reminders.
Contact your lender if you're struggling to pay.
A car loan can be a stepping stone to better credit if managed responsibly.
KEY FACTORS You Need to Know about Credit Scores and Car Loans (Former Dealer Explains)
How Credit Scores Affect Car Loan Approvals
Think of your credit score as a financial report card that lenders use to evaluate your car loan application. It gives them a quick snapshot of your borrowing history and ability to repay loans. In fact, 90% of top U.S. lenders rely on FICO Scores to make these decisions[9]. Your credit score doesn’t just determine whether you get approved - it also impacts the interest rate you’ll pay. Generally, a lower score means a higher interest rate, which can significantly increase the total cost of your loan over time[5].
Credit Score Ranges and Loan Terms
Your credit score plays a major role in shaping the terms of your loan. Here’s how different credit score ranges can affect the interest rates you’re offered, based on Experian’s Q4 2024 data:
Super Prime (781–850): Borrowers in this range enjoy the best rates, with average APRs of 4.77% for new cars and 7.67% for used cars.
Prime (661–780): Competitive rates are available, around 6.40% for new vehicles and 9.95% for used ones.
Near Prime (601–660): Rates climb to about 9.59% for new cars and 14.46% for used cars.
Subprime (501–600): Borrowers face steeper rates, averaging 13.08% for new vehicles and 19.38% for used ones.
Deep Subprime (300–500): The highest rates apply here, with averages of 15.75% for new cars and 21.81% for used cars.
On average, new car buyers had a 749 VantageScore in Q4 2024, compared to 687 for used car buyers. This highlights that financing a new car typically requires a stronger credit profile[3].
Other Factors Lenders Review
While credit scores are crucial, they’re not the only factor lenders consider. Here are some additional elements that can influence your approval and loan terms:
Debt-to-Income Ratio (DTI): A low DTI - ideally under 50% - can improve your chances of approval[8].
Income and Employment History: Lenders often check for stable income and consistent employment[7].
Down Payment: A larger down payment reduces the loan amount, lowers the lender’s risk, and can help you secure better terms[7][10].
Loan Term Length: Shorter terms mean higher monthly payments but less total interest, while longer terms reduce monthly payments but increase overall interest costs[7].
Vehicle Details: Lenders assess the car’s age, mileage, condition, and resale value since the vehicle serves as collateral[8].
Assets and Cash Flow: Some lenders review your overall financial stability by looking at your assets and cash flow[8].
Borrowers with FICO scores of 800 or higher are considered excellent[8]. Those with scores above 780 typically qualify for the lowest interest rates[6]. Most lenders prefer buyers with scores in the prime range (661 and above) to offer the most favorable loan terms[3].
How Car Loans Impact Your Credit Score
Taking out a car loan ties your vehicle financing directly to your credit profile. How you handle this loan - whether you make payments on time or miss them - can either boost your credit score or harm it significantly.
Building Good Payment History
Your payment history is the single most important factor in determining your credit score. Every on-time car loan payment adds positively to your record, helping credit bureaus evaluate your reliability as a borrower.
Car loans often come with fixed monthly payments, making it easier to plan your budget compared to the fluctuating balances of credit cards. To stay on track, consider setting up automatic payments or reminders to avoid missing deadlines.
If you're struggling to make payments, reach out to your lender right away. They may offer options like deferring payments or modifying your loan terms. A strong payment history, combined with a mix of different types of credit, can help strengthen your overall credit health.
Credit Mix and Credit Health
A well-rounded credit mix - such as having both installment loans (like car loans) and revolving credit (like credit cards) - accounts for about 10% of your FICO score [1]. Adding a car loan to your credit portfolio can show lenders that you’re capable of managing various types of debt.
"Many credit-building tips are more of a marathon than a sprint: Pay your bills on time, keep your debts low and show that you can successfully manage different types of credit over time." - Ted Rossman, Senior Industry Analyst at Bankrate [11]
This is especially helpful for those who are new to credit or rebuilding their scores. However, while a diverse credit mix can be beneficial, mistakes like late payments can quickly undo any progress.
Risks: Late Payments and Defaults
Although car loans can help build credit, they come with potential risks. Payments made after the due date are classified as late [14]. Typically, creditors don’t report late payments to credit bureaus until they are at least 30 days overdue [13], but even one late payment can drop your score by 100 points or more [14].
"Missing a car payment can quickly escalate to severe consequences, including damage to your credit score and vehicle repossession. Act quickly if you miss a payment or are unable to make your payment. By contacting your lender early, you can minimize the damages." - LaToya Irby, Personal Finance Writer [12]
The longer a payment is overdue, the worse the consequences. Experian data from Q2 2024 shows that 2.93% of auto loans and leases were over 30 days past due [12]. If payments are 30 to 90 days late, lenders may declare your loan in default [15]. After 90 days of non-payment, repossession becomes a real possibility [12][15]. To make matters worse, late payments can stay on your credit report for up to seven years [13].
The best way to avoid these pitfalls is to communicate proactively. If you think you might miss a payment, contact your lender before the due date to discuss possible solutions.
Using Car Loans to Build or Fix Credit
Car loans can be a practical way to establish or improve your credit, provided they're handled wisely. The key lies in selecting clear loan terms and consistently making payments on time.
Picking the Right Loan for Your Budget
When evaluating car loans, don't just focus on the monthly payment - look closely at the interest rates, which can vary significantly based on your credit score. According to Experian data from Q4 2024, borrowers with lower credit scores faced average interest rates ranging from 14.46% to 21.81% for used car loans and 9.59% to 15.75% for new car loans [17].
Making a larger down payment can improve your chances of approval and might even help you secure better interest rates. Some lenders also offer programs that reward consistent, on-time payments with reduced interest rates, lowering the overall cost of the loan over time [17].
If your credit is severely damaged, there are specialized financing options available. Credit builder loans, for instance, are designed to help individuals purchase a vehicle while working on their credit scores [16]. While these loans often come with higher interest rates, they can be a stepping stone toward better credit when managed responsibly.
Budgeting and Automatic Payments
Once your loan is secured, maintaining good credit depends on disciplined payment habits. Setting up automatic payments from your checking account is an effective way to avoid missed deadlines. Most lenders provide this service for free, ensuring your payments are made on time, even during busy periods. Alternatively, you can opt for text or email reminders to help you stay on track [2].
It's also smart to include a buffer in your budget for unexpected expenses. If you anticipate difficulty making a payment, reach out to your lender before the due date. Many lenders are willing to work with borrowers who communicate proactively about temporary financial challenges.
Paying more than the minimum due each month can help reduce the total interest paid over the life of the loan. It also allows you to build equity in your vehicle more quickly [4]. By combining disciplined budgeting with automated payments, you can steadily improve your credit while managing your loan effectively.
How Hello Motors Helps Build Credit
Hello Motors is dedicated to helping individuals with all types of credit histories access reliable transportation while improving their financial standing. They offer flexible financing solutions tailored to borrowers with poor credit, no credit history, or past financial setbacks.
Through partnerships with a wide range of financial lenders, Hello Motors often secures financing options that traditional banks might reject. Their Custom Financing plans are designed to meet individual needs, removing many of the barriers that come with conventional credit requirements.
What sets Hello Motors apart is their commitment to long-term customer success. They don't just aim to sell cars - they work closely with customers to clarify loan terms and create realistic payment plans that fit within their budgets. Their multilingual support team, available in English, French, Spanish, and Arabic, ensures clear communication throughout the process.
Additionally, Hello Motors offers a home delivery service, eliminating logistical hurdles and making it easier for customers to focus on consistent, on-time payments without added stress. This customer-first approach simplifies the car-buying process and supports financial growth.
Key Points and Next Steps
Taking out a car loan can help build your credit in two key ways: by adding variety to your credit mix and by boosting your payment history, which makes up 35% of your FICO® Score [2]. But to truly benefit, sticking to a plan and staying disciplined is essential.
Start by setting up automatic payments to ensure consistency. For extra peace of mind, enable text or email reminders as backups. If you find yourself struggling financially, don’t wait - reach out to your lender immediately. Many lenders offer solutions like payment deferment, but acting early is crucial to keeping your credit intact.
While managing your car loan is important, your overall credit health plays a big role too. Keep your credit card balances low to maintain a healthy credit utilization ratio, and regularly review your credit report to catch and correct any errors. If debt feels overwhelming, consider working with a certified nonprofit credit counselor. They can help you create a strategy tailored to your financial situation.
Hello Motors is committed to helping customers on their credit-building journey. They offer flexible financing options tailored to different credit situations, including potential perks like $0 down payments and deferred payments for up to three months (on approved credit) [18]. These options make car ownership more accessible, even for those with less-than-perfect credit. Customer Chris Hochscheidt shared his success story:
"The team worked out everything for me to get approved when others wouldn't and now I'm driving my dream car with an amazing rate!" [18]
Hello Motors also makes the process easier with home delivery and multilingual support in English, French, Spanish, and Arabic. This reduces the stress of logistics so you can focus on making consistent payments - key to improving your credit over time. Their Custom Financing plans are designed to fit your unique situation, removing rigid credit barriers and making it possible to rebuild your financial standing.
Start today: with a well-structured loan and timely payments, your car loan can become a stepping stone toward better credit and long-term financial growth.
