If you’re in the market for a new car, you might be wondering how taking out a loan will affect your credit. While your rating might drop at first, a secured loan can boost your rating in the long term. Here are a few ways financing a vehicle might affect your credit rating.

Before Accepting the Loan

When you apply for a loan, most lenders will do a hard inquiry of your credit report. An inquiry will cause your score to drop by a few points, but don’t worry if you’re shopping around for a loan. The credit reporting bureaus will combine all inquiries of the same type that occur within 14 days.

After Taking the Loan

Your available credit and debt-to-income ratios are some of the most important factors affecting your credit score. Taking on a new secured loan reduces your available credit and increases your monthly payments, so your rating might go down a few more points.

However, a history of on-time payments demonstrates to creditors that you can manage your finances responsibly. Making regular payments on your car loan can boost your credit score over time, making auto loans smart options for those without significant credit histories.

Paying Off the Loan

As the balance on the auto loan goes down, your percentage of available credit will go up. As long as you make your payments on time, your credit score will likely rise. Paying off the loan shows reliability, so future lenders will be more likely to issue loans with lower interest rates and fewer fees.

With hundreds of millions of dollars in assets and over 60,000 members across Hawaii, Hawaiian Financial FCU is one of the leading financial institutions in the state, with a reputation for combining personalized service with technologically advanced personal banking solutions. Learn more about our broad array of services, follow us on Facebook, Twitter, and Instagram for news and updates, or call (808) 832-3700 on Oahu or toll-free at (800) 272-5255 with any questions.