Can a Car Loan Hurt Your Credit Score? What You Need to Know Before Applying

When you apply for an auto loan, the lender pulls your credit report to assess your financial reliability. This check is known as a hard inquiry, and while it's a standard part of the process, it can temporarily dip your credit score by a few points — usually no more than 10.

If you apply with several lenders to compare offers within a short window — say, two to four weeks — most credit bureaus count it as a single inquiry. So, rate-shopping won’t cause major harm, as long as you do it quickly.

Also Read: How to Maintain a 700+ Credit Score: 7 Habits Smart Borrowers Swear By | Republic World

Missing EMIs can bring your score down

Once your loan is approved and disbursed, the real test begins -repayment. The biggest risk to your credit score comes from missed or delayed EMI payments. Even one late installment can hurt your credit record and remain on your report for years.

What’s more, taking on a large loan that stretches your monthly budget can raise your overall debt burden — which affects your credit utilisation ratio, another key factor in credit scoring.

How can your credit score could improve?

A car loan can improve your credit score if you manage it well. Paying your EMIs on time every month builds a positive payment history — the most important factor in most credit scores. It also adds variety to your credit profile by introducing installment-based debt, which complements revolving credit like credit cards. For young professionals or first-time borrowers, a well-managed auto loan can be the foundation for building a strong credit history.

Key things to be watchful about

Before you take out a car loan, be clear-eyed about what you're signing up for. Check your credit score before applying — a high score can help you negotiate better terms. Choose a loan amount and EMI that won’t strain your monthly finances.

Avoid skipping payments or defaulting. And while early repayment can save you interest, very short repayment periods might limit your credit-building potential. Finally, read the fine print: many borrowers overlook prepayment charges, insurance bundling, or hidden processing fees that can affect the total cost — if not your score directly, then your budget indirectly.