When you take out a car loan, you will gain an opportunity to improve your credit standing. However, it won't happen overnight and it will require effort on your part.

In order to make your car loan work for your credit and not against it, there are three basic things to remember. First, if you're "loan shopping," try to do this within a relatively short period of time. Next, stick to your budget and don't overspend when picking out a car. And, finally, when it comes to your car payments, remember your due date and avoid being late.

The Initial Impact Your Car Loan has on Your Credit Score

Your Car Loan

Just the act of applying for an auto loan will cause your credit score to take a slight dip. When you apply for a loan or any other form of credit, a "hard inquiry" is placed on your credit file. This inquiry will fall off pretty quickly, so you shouldn't be alarmed when your score drops by a few points.

Also, if you're loan shopping for a better interest rate, multiple inquiries in a short amount of time will only count as one when your credit score is calculated. With your FICO score, you have a 30-day window to shop for a loan. But with your Vantage score, this window is only open for two weeks. So, while you shouldn't rush, you should keep this timeframe in mind when filling out loan applications.

Once you're approved and you sign on the dotted line, you may lose a few more credit score points. This is because the overall length of your credit history makes up about 15% of your credit score. And adding a new account shortens the average length of your history. Again, this dip is temporary, and your rating should bounce back soon.

Making Good Decisions when Applying for a Car Loan

Depending on your situation, your credit score might jump by a few points when you're approved for an auto loan. When your credit score is calculated, 10% of your rating comes from your credit mix. Lenders like to see both revolving and installment accounts in a consumer's credit history. So, if you didn't have any installment accounts on your reports before, the addition of your car loan should help.

Also, it's wise to be frugal when financing a vehicle. If you purchase an expensive vehicle that comes with a hefty car payment, it's more likely that you may come up short one month. Staying within your budget is a good way to ensure that you'll be successful with your auto loan.

The Importance of Making Timely Payments on Your Car Loan

Whether your car loan helps or hurts your credit comes down to how well you manage your payments. If you make every payment on time, your credit rating should gradually improve over the life of the loan. But if you're habitually late, the opposite will happen. Or, in the worst cases, poor auto loan management could leave you with badly damaged credit for years to come.

Accidentally missing a car payment due date a couple of times won't kill your credit. If your payment is less than 30 days late, you'll probably have to pay a late fee. But it won't show up on your credit reports or affect your score.

On the other hand, if your payment is late by more than 30 days, it will show up on your credit reports. It will also stay there for up to seven years and cause your score to drop. If you stop making payments for a while, it may seem to your lender that you don't intend to pay at all.

When this happens, the lender will probably repossess the car, and your credit score will plummet. This repossession will stay on your credit reports for seven years after the date of your first delinquency. The result will be a serious red flag for future lenders.

Getting a Car Loan with Bad Credit

If you already have bad credit and need to finance a vehicle, Drivers Lane can help. Even if you've had missed payments, repossession or bankruptcy in the past, we may be able to work with your situation. We can match you with a dealership in your area that can give you a better chance at auto loan approval. You may even be able to buy a new or used car with little or no money down.

It costs nothing to apply with us and there are no obligations attached. Give us a try and find out what thousands of bad credit car buyers already know: Drivers Lane can show you how to get back on the road. Just fill out our simple and secure online application to get started today.