How Auto Loans Affect Your Credit (And How to Get the Best Rate)
Taking out an auto loan doesn’t just get you behind the wheel of a new car it also has a direct impact on your credit score. Whether you’re buying your first vehicle or trading in for an upgrade, understanding how auto loans affect your credit can help you make smarter borrowing decisions and protect your financial health.
In this guide, we’ll break down exactly how auto loans influence your credit profile, how to shop for the best rates without damaging your score, and what to watch for along the way.
How Auto Loans Affect Your Credit Score
An auto loan can help your credit or hurt it depending on how you manage it. Let’s look at the specific credit score factors involved.
1. Credit Inquiries (10% of FICO Score)
When you apply for an auto loan, lenders will perform a hard inquiry to check your credit. This may drop your score slightly (usually by 5 points or less) and will stay on your report for two years though it only affects your score for about 12 months.
Pro tip: If you’re rate shopping, multiple inquiries made within a 14-45 day window (depending on the scoring model) are treated as one inquiry for scoring purposes. That way, you’re not penalized for comparing offers.
2. Credit Mix (10%)
Auto loans are considered installment loans different from credit cards, which are revolving credit. Having a mix of both can boost your credit, especially if your profile previously only included revolving accounts.
Adding an installment loan shows that you can manage different types of debt responsibly, improving your credit diversity.
3. New Account Age (15%)
When you take on a new auto loan, it slightly lowers the average age of your credit accounts, which can temporarily reduce your score. Over time, as you make consistent payments, your account age grows and contributes positively to your profile.
4. Payment History (35%)
Your payment history is the single most important factor in your credit score. Each on-time auto loan payment strengthens your score. However, a single missed or late payment (30+ days past due) can have a major negative impact.
5. Credit Utilization (30%) — Indirect Effect
While auto loans don’t directly affect your credit utilization ratio (which applies to revolving debt like credit cards), they can affect how lenders perceive your overall debt-to-income ratio (DTI) especially when applying for a mortgage or other large loans.
The larger the auto loan relative to your income, the more “stretched” you may appear to lenders, even if it doesn’t hurt your score numerically.
How to Shop for an Auto Loan Without Hurting Your Credit
Shopping smart means getting the best deal on an auto loan without damaging your credit. Here’s how to do it:
1. Check Your Credit Report First
Before applying, pull your free credit reports at AnnualCreditReport.com and check your scores through tools like Credit Karma or your bank’s credit dashboard.
Knowing your credit tier helps you anticipate your likely interest rate.
2. Prequalify Without a Hard Pull
Many lenders — including Capital One, Carvana, and LightStream allow you to prequalify with just a soft inquiry, which doesn’t impact your score. Use this to get a rough estimate of your terms.
3. Apply Within a Rate-Shopping Window
When you’re ready to apply officially, submit all your loan applications within a 14- to 45-day window (depending on the credit scoring model used). These hard inquiries will be treated as one for credit scoring purposes.
This strategy gives you the freedom to compare interest rates, fees, and terms from banks, credit unions, and dealerships without racking up unnecessary credit dings.
4. Compare Total Cost — Not Just Monthly Payment
A lower monthly payment doesn’t always mean a better deal. Watch for longer loan terms that reduce your payment but increase the total interest paid. Calculate the total cost of the loan, including APR and any extras.
What Is a Good Auto Loan Rate in 2025?
As of 2025, here are average auto loan interest rates by credit tier:
| Credit Score Range | New Car APR | Used Car APR |
|---|---|---|
| 781–850 (Excellent) | 5.2% | 6.1% |
| 661–780 (Good) | 6.3% | 7.1% |
| 601–660 (Fair) | 9.0% | 10.5% |
| 501–600 (Poor) | 12.8% | 16.4% |
| 300–500 (Very Poor) | 14.6%+ | 19.0%+ |
Tips to lower your rate:
- Improve your credit score before applying
- Consider a co-signer with stronger credit
- Make a larger down payment
- Get preapproved with a credit union
Does Paying Off an Auto Loan Early Help Your Credit?
It can — but not always significantly.
Early payoff means less interest paid and potentially improved debt-to-income ratio. However, it may slightly reduce your credit mix and average account age. If your main goal is a better credit score, making on-time payments over the full loan term tends to have more consistent benefits.
If you plan to take out a mortgage or personal loan soon, early payoff might free up room in your finances and make you more attractive to lenders.
Final Thoughts
An auto loan can be a powerful tool for building credit especially if you have a thin or limited credit history. It adds diversity to your profile, builds a long-term payment history, and shows lenders you can manage large debts.
Just be sure to:
- Shop rates carefully
- Make on-time payments
- Avoid taking on more debt than you can handle
The key is balance: manage the loan wisely, and it can work for your credit not against it.
Next up: Find out what happens when things go off track in What Happens If You Miss an Auto Loan Payment?
