When was the last time you checked your credit score? If you’re like most people, it hasn’t been recently. Credit seems to be one of those things that no one thinks about until there is a need.
Why Credit is Important for Everyone
Credit is essential to everyone, no matter how well they manage their money. A good credit score means lower interest rates on credit cards and other lines of credit.
It also makes it easier for you to get financing when you want to buy a car, a home, or borrow for any other purpose. Conversely, poor credit makes all of these more challenging and more expensive.
Credit scores summarize your payment history, including how much debt you owe. Also considered are installment credit and the length of time your credit history has been on file.
Credit scores range between 300 and 900 and represent your overall creditworthiness. A high score of over 800 would be impressive, while below 400 would be considered very poor.
Can Having a Car Loan Help My Credit Score?
The question here is, can a car loan really improve your credit? The answer is yes, it possibly can. This probably isn’t that important to you unless your credit score has taken a few hits in the past. Your score will reflect if you don’t pay your bills on time or consistently.
If you have a low credit score, take time to review your report. Try to figure out how to avoid problems in the future and identify any errors in the report. It all boils down to this, the best way to improve your score is to pay your bills on time and not miss payments.
Car loans can be an effective way to improve your rating. If you find a lender willing to approve you for a car loan even though you have bad credit, this loan can be very effective. Being consistent with your payments can increase your score by a third.
How Your Credit Score is Determined
Your payment history comprises about 35% of your credit score while revolving credit that you use makes up another 30%. Revolving credit is credit for which there is no set number of payments, such as a credit card. Revolving credit also automatically renews. As you pay off the balance each month, you can again use the credit up to your limit.
So these two items make up a large part of your score. Late or missed payments will damage your credit score. You can minimize the negative effect with positive activity.
A car loan can help in this regard. If you pay your bills on time, every time, and never miss a payment, you will rebuild even a tainted credit score. This is because past mistakes gradually fade, replaced by more recent activity.
Six Steps You Can Take to Improve Your Credit—Before and After You Get the Loan
Begin rebuilding your credit even before you get the car loan. Follow these six steps:
- Take immediate steps to pay down any overdue bills. If you can’t pay them off entirely, at least pay as much as you can initially, and then make consistent payments until the old debt disappears.
- Dispute any errors on your credit report. You should go over your report in detail and check for any errors. Credit reporting agencies make mistakes at times. If you find something in error, such as someone else’s activity reported on your file or a payment marked late that you can show was paid on time, dispute the errors. It is your right to do so, and credit agencies have procedures to take care of this.
- Save money towards a down payment. The more you can put in as a down payment, the better your chances of getting approved. You may even get a better interest rate on the loan. Of course, you’ll be reducing the amount of each payment as well since you’ll be borrowing less money.
- Only buy what you can afford. It’s easy to be drawn in by a great-looking late-model car, but be realistic about what you can afford. A high monthly payment can be very stressful. If you get behind because of some unexpected circumstances, you are going against your plan to improve your credit. It’s best to identify the upper limit of what you can afford as a monthly payment and then make sure not to exceed that when taking out a loan.
- Avoid applying with many different lenders. Sending applications to several banks or lending institutions can reduce your chances of approval. So do some research ahead of time to find those offering the lowest rate and only apply to the best. An even better way is to get the help of auto loan professionals like Carlaunch. We take your application and do the shopping for you. We have an entire network of lenders and will work only with the ones that have the best rate and terms for you. We’ll do our best to get you approved.
- Make sure to keep up with your payments. Once you have your car, ensure you always pay on time and in full. Good credit depends on paying on time. Failing to do so will result in a negative entry and remain on your credit report for seven years. Your chances of getting another loan in the future decrease significantly, and you may see higher interest rates on other services.
Why Auto Loans Are a Good Strategy to Build Credit
If you have had credit problems in the past, an auto loan can be a great strategy to raise your score by a good margin. Here are three reasons why:
Easy approval. Auto loans are comparatively easy to qualify for in Canada, even if your credit needs improvement. Canada allows for subprime loans, designed for those with credit that is below average (typically any score below 670). The interest rate will likely be higher than a prime loan, but you may still qualify for the loan.
Some auto dealerships only offer prime loans, so you’ll have to shop around a bit more to find a subprime lender. We can help! Carlaunch has a huge network of dealers and lenders and can very likely find you the loan you need. We’ll seek out the best rate and save you hours of searching and applying as well. Start the process today by filling out our quick and easy application, and we’ll be in touch shortly.
Secured loans are easier to get. A secured loan is one backed with collateral. In this case, the vehicle is the collateral. If you fail to make your payments for a period of time, the lender will repossess the car and recoup most of the loss. Secured loans are a bit easier to get because of the lower risk to the lender. That’s why you may still qualify even with bad credit.
Build credit by paying on time. To improve your credit rating, you must consistently demonstrate financial responsibility. The best way to do that is to have some debt and make your payments in full and on time each month.
Obtaining an auto loan and keeping up with the payments while taking care of your other financial responsibilities clearly indicates that you are a reasonable credit risk. As a result, your score will improve over time.
Another interesting point is that if your main goal is to build good credit, you should keep the car loan open even if you can pay it off ahead of time. Although paying off the car might be tempting, consistently paying a recurring monthly bill is the best way to achieve an excellent credit rating. However, missing even one payment or not paying in full will negatively affect your score.
Possible Drawbacks to Auto Loans
We’ve discussed the positives, but there are a few drawbacks to getting an auto loan. Therefore, it would be best to consider all sides of the issue before deciding to borrow. Here are three potential downsides:
Risk of repossession. As mentioned, the car is the collateral backing the loan. Consequently, if you fail to make payments, the loan company will eventually have the vehicle repossessed. Not only will your credit score be severely damaged, but you will also find yourself without a car.
Less money on hand. Obviously, if you have a car payment each month, you will be left with less for other expenses. That’s why it’s important to realistically assess your budget before buying a car to ensure you are not overextending yourself financially.
High-interest rate. You’ll be paying a higher interest rate if you only qualify for a subprime loan because of bad credit. You might consider repairing your credit by another means before applying for the auto loan. You’ll save some money on the interest if you can make do with your old vehicle for a bit longer. But as discussed above, unsecured loans are typically harder to get, so an auto loan might be your best bet.
Why not consult Carlaunch? We’ll do our best to find you a reasonable rate and can even assist in finding you a suitable car.
Additional Benefits of Improving Your Credit Through an Auto Loan
There are some additional benefits to improving your credit with a car loan. If you’re on the fence, these may help you decide.
First, as you make regular payments, your credit score will improve. Then, after a time, you may be able to refinance at a much lower interest rate, potentially saving you money every month.
Another benefit to obtaining a car loan is improving your chances of approval for other loans or financing. For example, you may have a house mortgage, line of credit, or personal loan in mind for the future. Getting a car loan and paying on time each month can make those a reality when the time comes.
Let Us Help You Improve Your Credit With a Car Loan
We’ve discussed how car loans can be an excellent way to rebuild bad credit. So why not make the whole process stress-free by getting the help of Carlaunch? We specialize in helping Canadians get the best rates on auto loans, regardless of their credit history.
Fill out our application now (it just takes 2 minutes), and someone will contact you in a few days to discuss how we can help.