Auto loans may seem complicated and confusing, but you’ll likely need one to purchase the car you want. You might be wondering how an auto loan will affect your credit score and lending ability in the future. Surprisingly, it can actually improve your situation.

How Auto Loans Appear on Your Report

Merely looking at auto loans can lead to changes on your credit report. Most lenders will run credit checks to see if your score is up to par, and these checks will appear as hard inquiries on your report. If you perform multiple inquiries over a 30-day period, then they’ll only show as one for record purposes. A hard inquiry can lead to a few points shaved off your credit score.

Getting a loan will also be seen as a new debt, which can take off a few more points. On the other hand, it’ll be seen as an installment account, which is better for your credit in the long run.

How Auto Loans Improve Credit

The most important thing to do is to keep paying your monthly installments on time. A full 50% of your credit report is based on either payment history or length of credit history, and both of these are dependent on whether you pay on time or not. 10% is based on the different kinds of credit that you use, and another 10% is based on new credit. This means that maintaining a healthy mix of loans or things like credit cards can be a big boost to lenders as your credit score continues to rise.

You should also consider taking a look at your report to see if there are any errors. Everyone is legally entitled to free copies of their reports from all three agencies every 12 months. These are considered soft inquiries, so they won’t damage your score. In addition, you can find errors in your report and let the agencies know about the problems.

You should also read the fine print on your loan. Even though you might be tempted to pay it off early to avoid extra interest, you should know that some loans will charge a penalty for doing that. In such cases, it’s generally better on your wallet and your score to just keep paying on schedule. If loan extensions are an option, then you should consider them if, for some reason, you can’t pay on time.