Loans of all kinds stay on your credit report for a long time – somewhere between two years and ten, depending on the loan. Generally, it’s a minimum of six years in the UK for open accounts, including car loans, mortgages and credit cards. Timeframes can vary depending on different credit reporting rules and different types of loan.
The idea of a loan being attached to your report for such a long time might sound a bit scary but it’s actually not a bad thing: if you manage your debts well and make all your repayments on time and in full, then this positive information will actively improve your credit score and make you more attractive to lenders. Having said that, if you’ve missed any payments or reported a bankruptcy, these will show up as negative marks that will bring your credit rating down and could affect your ability to access finance for years to come.
There are several factors, both good and bad, that will affect the way a car loan impacts your credit report, and how long it will stay on your report. Let’s take a look at some examples.
Missed payments
A missed payment can negatively impact your credit score. If you miss a payment, you may be offered a grace period, i.e. a set amount of time to make the payment without penalty (plus a late payment fee usually), but if you don’t pay within that time your lender can report you as delinquent. A delinquency report could stay on your credit file for up to seven years from the date of the missed payment, meaning that it could be visible on your credit file for a lot longer than the length of the original car loan. This can make it much trickier for you to get a new loan during this time. After up to seven years has passed, the delinquency report will be erased from your credit file.
Defaulting on your loan
If you don’t pay your loan within a certain time frame – usually somewhere between 30-90 days from the date of the missed payment – your lender will then declare your loan to be in default. If you still don’t pay the money owed, your car could be repossessed. Both a loan default and a repossession will show up as separate ‘black marks’ on your credit report where they will stay for up to seven years.
Making an early settlement on your loan
Paying off car finance or a personal loan early might affect your credit score slightly. This is because lenders prefer to see regular monthly payments as it shows you can manage your money well. But any negative impact will be small and short term, lasting just a few months. You can request a settlement figure from your lender to pay off your car finance at any time.
Debt settlement
Debt settlement is something very different. Debt settlement is when you pay less than you owe on a loan to settle a debt that you can no longer manage. While debt settlement can get you out of a fix if you are struggling, it will – you’ve guessed it – have a damaging effect on your credit score, and it will remain on your credit report for up to seven years.
We would never recommend taking out any type of finance if you are struggling with debt. Talk to your lender if you are in difficulties – they are legally obliged to help you. Only apply for credit if you are sure you can afford to make the repayments.
Having a good payment mix
On a more positive note, having a blend of credit accounts – e.g. car loans, credit cards and mortgages – can boost your credit score. If you already have a credit card that you pay off regularly and you then take out car finance or another kind of unsecured loan, providing that you make all your repayments when they are due, you will be much more attractive to future lenders than someone who only has one form of credit on their file. This is because you are showing lenders that you are responsible at managing different kinds of credit.
Paying off your loan on time
The absolute best thing you can do is pay off your loan on time. Payment history is far and away the most important factor when it comes to a healthy credit score – it’s what lenders look for above everything else. Repaying your loans on time shows lenders that you are trustworthy and reliable.
If you skip a monthly loan repayment, this could stay on your credit report for up to seven years.
Negative marks on your credit report won’t last forever – they are automatically removed after a set timeframe, meaning that you can build up your credit score in time.
A soft search won’t have any impact on your credit rating at all, meaning that you can find out if you’re eligible for car finance and get a personalised quote without committing.
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