How Do I Fix Bad Credit from Auto Loans?

Trisha Miller  | 

You’ve got a loan, but you’re finding it hard to keep up with the payments. Or maybe you’ve had a car loan default into collections and you have a repossession on your credit score. These things can affect your credit score in a big way. Let’s talk about how to bounce back and get your credit in a good spot before you decide to open up any new lines of credit.

How Does Buying a Car Affect My Credit?

Checking Your Credit:

Before you’re ever approved for a loan, an auto loan could affect your credit score slightly. Whenever you inquire about your credit or have a bank or other lender check your credit to see if you can be approved for a loan, it is documented in your credit history. However, this shouldn’t have a noticeable impact unless you have too many repeated credit inquiries in a given period of time (generally more than one every 90 days). Every loan that you apply to will affect you in this manner, not just auto loans.

How a Loan Looks on Your Report:

One you are approved for an auto loan, a few pieces of information about your loan are immediately added to your credit report. Anyone who checks your credit report will be able to see your application (in the form of an inquiry), your loan, the length of your loan, when your payments are due, and your history of paying on time (or not). In addition, at the start of this loan, your credit utilization may look high on your credit report, but it will differ from other types of negative credit utilization. If you purchase a $10,000 car, banks may be hesitant to let you borrow more money until the balance on your car is paid off a bit. They’ll look at your credit and see how much you’re currently borrowing, and they could determine that you can’t handle any new lines of credit for some time.

Auto Loans Look Different Than Other Loans on Your Credit:

Another thing to keep in mind, is the fact that credit bureaus will take into account the type of loan when determining your credit score. An auto loan shows up as an installment plan. You have an agreement with the bank to pay a certain amount of money on a particular day each month. With an auto loan, everyone starts with a full gauge and has to work their way down, and banks and credit bureaus understand that. This means, that having an auto loan on your credit report isn’t the same as having, let’s say, a maxed out credit card. With a credit card, you’re expected to keep the balance low and pay it off quickly. You start at zero, and then accumulate debt through spending. Having it maxed out for too long can look bad on your credit. However, a car loan is expected to start high and then eventually work its way down to zero. It shouldn’t negatively affect your credit unless you aren’t able to make your payments on time.

How Can an Auto Loan Hurt My Credit?

Late Payments:

Naturally, late payments are the biggest problem when it comes to auto loans negatively affecting your credit and in the world of auto loans, things can move quickly when a payment is late. You’ll most likely be charged a fee and you could be charged extra interest as well. This information will be sent to the credit bureaus and it will be added to your credit history under that loan.

Now, every situation is different, so a late payment will affect each of us differently. Someone with a good and full credit history will not be affected by one late payment as much as someone with little to no history or bad history. If you only have one isolated late payment to worry about, I wouldn’t be too afraid of the repercussions. As long as you get back on track, you should be just fine. On the other hand, if you’ve had many late payments over the course of your loan, you may have some credit damage that will need to be repaired.

Debt Collection & Repossession:

What’s more, if your payment is a month late or more, the bank will likely take action and fast. Your loan could be sent to collections in order to try and recover the funds quickly and this does not look good on your credit. If your late payment goes beyond this, then it’s likely that your bank and/or a collection agency has started the process of repossession. Auto loans are technically secured loans; that means your car can be used as collateral, and taken back by your lender as a way to recoup lost funds when you are not paying off your loan. If you aren’t able to remedy the late payment situation and your car is repossessed, this will be the current status under your auto loan on your credit report.

Once that happens, the bank will try and make back their money quickly. This commonly refers to the bank turning around and selling the car immediately. The tricky thing is, they might sell it for less than your original loan amount, since cars depreciate so quickly. This means you’re still responsible for the difference, since it depreciated under your ownership. This debt could be sent to collections until you are able to repay it, even after you lost your car. If you can’t, the bank or collection agency may decide to take legal action in order to recover their losses. If they do, that process will also show up on your credit report. So, between late payments, repossessions, and collections, your credit could be suffering badly if you’ve defaulted on an auto loan.

What Do I Do If My Auto Loan is Ruining My Credit?

Making Payment Arrangements:

If you’re still in the late payment stage, talk to your bank about options right now. Even if you’ve had a few late payments or you’re being sent to collections, talk to them about what they can help you with. You’d be surprised at what kind of options they might offer. Banks, lenders, and collection agencies simply want the loan to be paid off, sometimes they don’t care how. If the original terms of the agreement aren’t realistic for you anymore your bank may be willing to alter the loan terms. They may even offer late payment forgiveness, which could make a huge difference on your credit score. Repossession and reselling a car is work, and costs money; it can be in both your and your lender’s interest to avoid this.

With that being said, make sure that your expectations are realistic. You’re still going to have to make monthly payments, even if the total ends up being lower overall. If the bank and debt collectors work with you on a payment plan, do your absolute best to stick to it, for your credit’s sake. If you default on the loan again after a payment plan is made, it’s likely that the car will be repossessed quickly, so do what you can to take care of this loan fast.

Splitting the Difference:

Once your car is repossessed and sold, you’re going to have some damage on your credit report, but you can still remedy any outstanding balances before a debt collector threatens to sue for the remaining amount. Talk to the collectors and see what kinds of options they might have for you. Often, they will ask for the remainder in a lump sum, but you may be able to discuss other payment options such as installments. Just work on getting that paid off as soon as you can and make sure it is top priority in order to salvage your credit.

How Do I Repair My Credit After Auto Loan Mistakes?

Work With What You’ve Got:

Even if you’ve got late payments, repossessions, and public records negatively impacting your credit, you can still begin to recover from the effects of your auto loan. Let’s just say that you’ve got all three of these issues to deal with on your credit history. It’s time to turn your attention to the remainder of your loans. Anything else that is affecting your credit needs to be your top priority right now if you want to start repairing your credit.

Debt Consolidation:

First, you already know that it’s important to make your payments on time, so beyond that it might be a good idea to take a look into debt consolidation if you’re feeling overwhelmed by all of your debt. If making payments on time is just simply not an option because you’ve got too many loans to deal with and the monthly payments are just too high, it’s time to talk to your bank and debt collectors about consolidating your debt into one large loan. This will often lower your monthly payment and it will make keeping track of all of your loans a breeze because there’s only one. From then on, every on-time payment that you make will go onto your credit history and will start to make more and more of a difference to your credit score as you build up a positive credit history.

Use a Secured Credit Card to Repair Your Credit:

Next, once you feel comfortable with the amount of debt you’ve got and you’re working towards eliminating it, think about bringing on another small loan that you can manage, such as a secured credit card. Secured credit cards are great for repairing your credit because the limit is low and they’re much easier to get approved for. You’ll need to put down a deposit in order to spend money, but each time that you spend and pay it off, you’ll get another good piece of information added to your credit history. Work on that for a while until you’re feeling confident about your spending habits and your credit history is looking better.

Know When You’re Ready for Another Auto Loan:

At this point, you might even be able to bring on another auto loan. You might not be able to be approved for an incredibly large amount and you’ll likely be required to put down a significant down payment, but having a new auto loan on your history can do wonders for your credit. If you feel confident enough to save up for a new down payment on your car and you know that you can make your payments on time, your credit will thank you for it. On-time payments on a larger loan will look great on your credit history and will help to bring up your credit score even faster than a secured credit card would be able to.

Don’t dwell on your credit mistakes. Any credit issue can be resolved with time, patience, and dedication to your credit repair cause. You won’t see a drastic change in your credit score overnight, but if you stick with it, it will be worth it in the end. Getting started on the path to good credit is the most difficult part. Just remember to make room in your budget for your monthly payments. If you feel like you’re not going to be able to make your payment on time, contact your bank to let them know. If you put in the time and effort, you can get your credit score where you need it to be.


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Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.

This post was updated August 30, 2017. It was originally published September 6, 2017.