Having a car finance payment plan in place can be an effective way to build your credit score, but only if you keep up with your repayments and do not breach the terms in your agreement. It shows you are trustworthy to other lenders as you provide evidence you are able to uphold your payment duties. Carry on reading for more details on how you can use your car finance payment plan to build your credit score.
Your Car Finance Payment Plan
Your car finance payment plan will be determined by the type of car finance you take. There are a number of different options out there, the most common of which are detailed below.
Hire Purchase (HP)
This type of loan secured against your new car, meaning you do not officially own it until the end of your deal. Essentially, you are hiring the car from the lender until the final payment has been made. However, you can request a settlement figure to pay off your outstanding balance at any point during the finance deal.
Personal Contract Purchase (PCP)
This is very similar to HP, but at the end of the deal you can hand the car back, obtain ownership of it with a balloon payment or use it as equity for a deposit for a new car.
Personal Contract Hire (PCH)
With a PCH deal you will never own the car. At the end of the deal, you will hand the car back, often making it a cheaper option when compared to PCP.
Bad Credit Car Finance
This option helps people with low or poor credit obtain a car finance deal. It allows you to spread the total amount of buying or leasing car over a fixed period of time with monthly payments. No deposit is required for bad credit car finance, no matter what type of deal you end up with. The application process first begins with a ‘soft’ credit check. This will determine whether or not your lender feels they can find a finance deal for you, without affecting your credit score in any way.
Building Your Credit Score
Your repayment history is used to gauge your creditworthiness and trustworthiness when it comes to making payments to finance providers. Whenever you apply for credit, this will be checked for any evidence to demonstrate you are a dependable customer. If you keep up with your payments on your car finance payment plan, you will steadily build up your credit score.
If you make a late payment, this can cause a minor negative marker to appear on your credit file. This will not do too much harm as it is one isolated incident. However, more harm will come if you have multiple missed payments or arrears, as it provides the idea that you are not trustworthy with credit. If any of your finance plans default, this will have a significant impact on your credit score. This will make it harder to be accepted for credit when you next apply.