So, you’re considering buying a new car, but you’re wondering if taking out a loan will be the right move for you. You might be asking yourself, “Is a car loan considered debt?” and “Will making payments on it negatively affect my credit score?”
The Short Answer:
Yes, a car loan is considered debt. However, making timely payments on your car loan can actually help improve your credit score. This is because your payment history makes up a significant portion of your credit score.
But Let’s Dive Deeper:
Is a Car Loan Considered Debt?
Absolutely! A car loan is a type of installment loan, which means you borrow a sum of money and repay it over time with interest. Just like any other loan, you’ll be responsible for making regular payments until the loan is paid off in full
Will Making Payments Affect My Credit Score?
The good news is that making your car loan payments on time can actually boost your credit score. Your payment history accounts for 35% of your FICO score, so consistently making on-time payments demonstrates your creditworthiness to lenders.
However, there are a few things to keep in mind:
- Late payments: Even one late payment can negatively impact your credit score. Aim to make all your payments on time, every time.
- Credit utilization: The amount of credit you’re using compared to your available credit is also a factor in your credit score. Ideally, you should aim to keep your credit utilization below 30%.
- Length of credit history: The longer your credit history, the better. Making consistent payments on your car loan can help lengthen your credit history and improve your score.
When to Avoid Car Loan Debt:
While car loans can be a helpful tool for financing your new ride, there are situations where it might be best to avoid taking on this type of debt. Here are a few things to consider:
- Can you afford the car? Just because you can get a loan for a certain car doesn’t mean you can truly afford it. Make sure you can comfortably afford the monthly payments, as well as the other costs associated with owning a car, such as insurance, gas, and maintenance.
- What is the interest rate? The interest rate on your car loan will significantly impact the total amount you pay for the car. If the interest rate is high, it might be worth considering other options, such as saving up for a down payment or buying a less expensive car.
- Do you have good credit? If you have good credit, you’ll likely qualify for a lower interest rate. However, if you have bad credit, you may be offered a higher interest rate, which could make the loan less affordable.
When a Car Loan Makes Sense:
In some cases, taking out a car loan can be a smart financial decision. Here are a few situations where it might make sense:
- You need a car to get to work or school. If you rely on your car to get around, taking out a loan to buy a reliable vehicle could be a good investment.
- You can get a low interest rate. If you have good credit, you may be able to qualify for a low interest rate, which can make the loan more affordable.
- You can make a large down payment. Making a large down payment will reduce the amount you need to borrow and can also help you qualify for a lower interest rate.
The Bottom Line:
Whether or not a car loan is right for you depends on your individual circumstances. By carefully considering your financial situation and the terms of the loan, you can make an informed decision about whether or not taking out a car loan is the right move for you.
Additional Resources:
- Bankrate: Should I Avoid Auto Loan Debt?
- WalletHub: Are the payments that I make on my car considered debt?
- Experian: How to Get a Car Loan With Bad Credit
- NerdWallet: Car Loan Calculator
Remember: Making informed financial decisions is key to achieving your financial goals. Do your research, compare your options, and choose the path that’s right for you!
Ryan Fuchs , Financial Planner
The auto loan itself would be considered the “debt. ” The payments toward it would be considered “debt payments. “Monthly auto loan payments would be included on the debt side of your credit report if you were applying for another loan somewhere and they looked at your debt-to-income ratio.”
Unless you are making late payments, making payments will have a positive effect on your credit score (at worst, it won’t change the score much in the short term). You will be improving your payment history on time, which accounts for 33.5 percent of your FICO score, and you will be reducing your total debt, which is also a factor in your FICO score. This answer was first published on 09/18/15. You should always verify accuracy and up to date information about a financial product with the financial institution making it available. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
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Why Getting a Car Loan Is a Bad Idea
FAQ
Is car loan a debt?
Is a loan considered debt?
Is a car payment considered bad debt?
Is a car loan considered debt when buying a house?
Should you pay cash for a car loan?
You can make payments over time and build credit with a car loan — paying cash doesn’t afford you this luxury. Still, paying cash alleviates the burden of monthly car payments for years to come, but isn’t without risk. Ultimately, weigh the benefits and drawbacks of each to decide what’s best for your financial situation.
Is a car loan a good debt?
A car loan might be considered “good” debt, if the following circumstances apply: You qualify for a super low interest rate (e.g. 0.9% to 1.9%). In that case, the manufacturer / dealer are basically subsidizing your loan to help sell their cars.
Can a borrower with bad credit get a car loan?
A borrower with bad credit does have financing choices, though. Start with a clean record, paying off any outstanding car loans and other debts before shopping for a new car. That improves your credit score and increases your options. Another option is a shorter loan term.
What is car loan debt relief?
Auto loan debt relief refers to different strategies that can help a person who is struggling to repay a car loan. Options can range from keeping the car and working with a lender to lower the payment to giving up the car. The best approach depends on your personal situation, how far behind you are on car payments and the amount you still owe.