Maintaining good credit plays a key role in your financial life and can open many doors in terms of financing, but a bad score can do the opposite. If you’re looking to build a positive credit profile or need to repair a damaged score, making timely payments on loans and credit products is one of the most effective ways to make an improvement.
So, what types of loans can help you establish a positive credit history? More specifically, does financing a car build credit?
Key Points
- A car loan can affect your credit score either positively or negatively, depending on how you manage it.
- You can use a car loan to build good credit if you make your loan payments on time every month.
- If you miss car loan payments, your credit score could take a hit.
Does Financing A Car Build Credit?
A car loan can have both a positive and negative effect on your credit score based on the criteria mentioned above. Here are some ways your credit may be affected with a car loan:
Positive Effects Of A Car Loan On Your Credit
A car loan can positively impact your credit in the following ways:
Making Timely Payments
Your car loan can have a positive impact on your credit when you make your car loan payments on-time and in full. Given that payment history often accounts for a large part of a credit score calculation, your car loan payments can help improve your credit.
Adding To Your Credit History
Opening a new account will add to your credit history length. While the initial opening on the account may reduce your average credit age, it will help increase it over time. This may positively affect your credit as your credit history usually has a weight of 15% on your credit score. Generally speaking, the longer these accounts are active, the better for your credit score.
Negative Effects Of A Car Loan On Your Credit
A car loan can affect your credit in the following ways:
Applying For New Credit
When you apply for a car loan, the lender will pull your credit file, which can cause your score to take a slight hit. However, your credit score shouldn’t stay down for long, as long as you maintain responsible financial habits.
Missing Payments
If you’re late paying your car loan payments, your credit score may suffer. Missing car payments is one of the worst things you can do when it comes to your credit score, given the weight that payment history has on your credit health.
Benefits Of Using A Car Loan To Rebuild Credit
Using a car loan to rebuild your credit comes with certain perks:
Rebuilding And Increasing Your Credit Score
As we’ve already covered, every timely payment that you make will help you steadily get your credit score back up to where it could and should be.
Refinance At A Lower Rate When Your Score Improves
With a low credit score, you may have trouble getting approved for a loan. But even if you do, you will likely be offered a higher interest rate on the loan than you would with a higher credit score. However, if you’ve been diligent about repaying your car loan, your credit score can see a major boost after a few months, after which you may be able to refinance at a much lower rate and save a bundle.
Improve Your Odds Of Securing Other Loans
Not only will a higher credit score make it easier to get approved for a car loan, but it can also open up the doors to other loan products. Mortgages, personal loans, and credit cards will be much easier to secure with a higher credit score, which you can build by being diligent with your car loan payments.
Drawbacks Of Using A Car Loan To Rebuild Credit
While there are certainly some advantages to using a car loan to rebuild credit, there are some downsides that you should be aware of:
Repossession Risk
When you take out a car loan, your new vehicle is being used as collateral to secure the loan. That means if you default on your loan payments, the lender could repossess the car in an effort to recoup their losses. That means not only will your credit score suffer, but you’ll be without a car, too.
High Interest Rates With Bad Credit
If you have a low credit score, the interest rate you will be offered will likely be pretty high. In turn, this can make your car loan very expensive. You’ll be paying a lot more toward interest than you need to be.
Your Money Is Tied Up
By taking out a car loan, you’ll be dedicating more of your income toward this new debt, leaving less money left over for other expenditures.
Rebuilding Credit With A Car Title Loan
Up to now, we’ve been talking about rebuilding your credit using a car loan. But what about a car title loan?
A car title loan is a type of financing that provides you with the cash you need in a lump sum in exchange for the title of your car. It’s not used to finance the purchase of a car. Instead, you’ll already need to own a vehicle to qualify for a car title loan.
In this case, the title of your vehicle – or ownership – is being used as collateral to secure the loan. With this arrangement, you would surrender the title of your loan and put a lien on it until you repay the full amount of the loan to the lender.
Perks Car Title Loans
- Credit checks are often not required. Some lenders don’t run credit checks for car title loans. This can be good news for borrowers with a bad credit score who may otherwise be unable to get approved for a traditional loan.
- The car serves as collateral. Car title loans are relatively easy to get approved for because they are secured loans that use the vehicle as collateral. As such, you won’t have to come up with any other collateral to secure this type of loan.
- Quick access to cash. Car title loans usually don’t take too long to process, which means you can get your hands on the money you need quickly. This can come in handy when you have a financial emergency to meet.
- May help improve your credit. If you are diligent with your loan payments, a car title loan can help you rebuild your credit.
- Consolidate your debts. The funds you receive from a car title loan may be used to consolidate your debts. This makes sense if you have many high-interest debts on the books, and the rate that you are given with a car title loan is lower. At the end of the day, this can help you save money and make managing bill payments easier.
Tips To Consider Before Applying For A Car Loan
Since having a car loan can play a role in the health of your credit, you’ll want to consider a few important things first before applying:
Finance According To Your Budget
A car loan means another bill to pay every month. Make sure you understand the cost of the loan and how much each monthly payment will be. Ideally, you should have plenty of money left over after having paid your car loan payments, as well as other bills you’re already paying. After all, missing a payment because you’re strapped for cash will hurt your credit score.
Know Your Eligibility Before Applying
Understand what your financial health and credit score are before applying for a car loan. These factors will impact not only your eligibility for car loan approval but the interest rate you may be offered. You can check your credit score for free using CompareHub, which will give you an idea of your chances of loan approval and the rate you may end up with.
Understand The Loan Term
You’ll be committed to paying your car loan for a certain amount of time. Unless you sell your car or come across a lump sum of money that will allow you to repay your loan early, you’ll need to continue making loan payments for the duration of your loan term. Make sure you’re financially capable of making this commitment. If you fail to make payments and allow the loan to default, your credit score will suffer.
Research Available Car Loan Options
The easiest, fastest, and most convenient way to shop around for car loans is to use an online platform that allows you to quickly scan available lenders and their offers. From there, you can see which lender offers the best loans at the lowest rates to ensure you’re getting the most affordable loan possible.
Final Thoughts
Not only can an auto loan help you purchase a car without having to come up with the price tag in full, but it can also offer you an opportunity to rebuild your credit score. If your score is currently lagging, you’ll want to take steps to give it a boost, and being responsible with your car loan payments is a great way to do just that.
