Public transit has become a way of life for many young adults and city dwellers, but the convenience of having your own car is an advantage that many people can’t pass up. Of course, that convenience comes with a cost. The average price of a new car is $34,077, and that price continues to increase annually by 2.7%!¹ For most Americans, the only way to pay such a high price is with a car loan. Just like any other large loan, your credit will most likely be a factor in the amount you can receive, the APR and more.

Whether your credit is in good standing or in need of some help, you might be worried about how taking out a car loan could affect your credit. We asked Harrine Freeman, a business owner, and Mariya Palanjian, sales and marketing director at ZadCars.com, what effect car loans could have on your credit, what to expect and how you can offset the cost.

When you apply for and get approved for a car loan, it generally causes your credit score to take a slight dip. However, it’s only temporary as when you make your payments on time, your credit score tends to recover quickly. Therefore, it’s important to understand there’s no reason to worry about the temporary drop in your credit score when you are approved for a car loan.

How A Car Loan Application Impacts Your Credit Score

When a lender runs a credit check to see if you qualify for a car loan, a hard inquiry is generated on your credit report. Every time you have a hard inquiry, it can reduce your credit score and it stays on your credit report for 5 years. For people with “good” or “excellent” credit scores, this won’t make too much of a difference. However, if your credit score is between “fair” and “bad”, the enquiries can have a negative impact. If you have several hard inquiries on your credit report, it can drop your credit score and put you in a lower tier where you may have to pay higher interest rates.

Soft Inquiries

When you check your own credit score or credit report,  this is called a soft inquiry. These are only seen by you when you pull a copy of your credit report and don’t have a negative impact on your credit score.

Car Loans Can Improve Your Credit Score

The hit on your credit score caused by easy car loans is only temporary and soon vanishes. But the positive effects of paying your car loan repayments on time lasts for as long as you are continuing to make on-time payments. Lenders like to see you are able to manage your other loans or credit in a responsible manner when they are considering you for a loan.

Three Common Types Of Credit Accounts

There are three common types of credit accounts, they are revolving accounts, lines of credit from home equity loans and installment loans. Revolving credit is mostly focused on credit cards while lines of credit will allow you a credit limit and payments are to be made monthly. Installment loans include mortgages, personal loans or car loans where you must make equal installments payments until it is paid off.

Dropping Credit by Skipping Payments

Prompt payments have a strong positive effect on credit, though skipping them has a stronger, more negative effect. Skipping payments completely is unacceptable and will result in very big drops in your credit score. A payment is usually considered skipped if it is more than 60 days late. If you make a late payment that is not very late, it is possible that the lender will extend a grace period and will not flag a late payment to the credit bureau, so your credit won’t be affected. Don’t despair if your payment is only about a week late but do call your lender to explain the circumstances.

What Happens if You Default

Defaulting on a loan is, in short, never something you want to do. It will ruin your credit and the record of your defaulting will appear on your credit history for the next seven years – a long time to pay for one mistake.

Other Auto Loan Options for Bad Credit

Researching lenders online is another option. Most of the major banks provide car loan calculators, and even allow you to apply for the loans online.  It is important to remember that you can still shop around.  If you are looking for more advice, Bankrate.com does a good job illustrating 9 steps that you can take to secure financing with a low credit score.

Finally, don’t worry about multiple credit inquiries affecting your credit score.  You generally have about 14 days to make multiple inquiries and have them count as one credit inquiry.  This should allow you to comparison shop before making a decision and getting your car loan.