There's no denying that cars are expensive purchases. For many, it's their first large purchase, and is usually only surpassed in value by the purchase of a house or property. In most cases, the purchase price of a vehicle is beyond our means, leading us to enter into a financing agreement where the purchase price of the vehicle is paid off over a long period - sometimes months, but usually years.
Aside from the interest that is levied on a finance agreement, many believe that entering into such an agreement will negatively affect your credit score and credit rating. While this is partially true, it works to your benefit in an even greater way if you meet the criteria laid out in the finance agreement and uphold your end of the contract.
Initial rating drop.
Your credit score takes a hit the moment the agreement is implemented, due to several reasons. When you first enter into the agreement, your disposable income drops as the repayment on the vehicle is added to your monthly costs and overheads. This drops how much you are able to afford, should you wish to enter another finance agreement for say, a house or second car.
The credit bureau also has no indication of how disciplined you are when it comes to repayments and places a rather large question mark next to your name which will remain there until such time as you have paid a few instalments.
Gradual improvement.
By remaining disciplined (ensuring that your repayments are made on time and for the full amount of the agreed monthly repayment), your credit score will start to improve. The longer you can continue honouring the agreement, the higher your credit score will go, eventually making up for the initial drop and improving from there onwards.
Negative effects.
Any late or short repayment will draw attention to your profile, and you will be monitored for repeating infractions. Should you repeatedly miss payments or fail to pay the agreed amount, your credit score will start to drop again. Continuing to do this is disastrous, and will result in defaulting on the agreement. This allows the bank to legally take action against you, repossessing your car (or other assets), to make up the shortfall owed to them and eventually leaving you blacklisted and unable to finance any further purchases.
