Improving Your Credit With A Car Loan
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-How does a car loan improve credit?
-5 steps to rebuilding credit with a car loan
-3 reasons to build credit with a car loan
-The benefits of using a car loan to improve bad credit
You may not give it much thought, or maybe you willfully ignore it. I’m talking about your credit score, no matter how much you may avoid thinking about it, it’s crucial to you. A good score could open many doors in terms of financing options, but a bad score could do the total opposite. Your credit score will dictate the amount of interest you pay on your credit card and also the likelihood of receiving car financing or a mortgage. Trying to get a car loan with bad credit may not be an easy task, but if you’re able to receive financing, a car loan could help fix your credit!
First Steps to Improve Your Credit
Once you’ve acknowledged or decided it’s time to improve your credit, the actions required may seem obvious but it’s critical that you follow them. First of all, you must make all the payments that are overdue in order to get your account back in good standing. The second step is a common misconception amongst Canadians, like many people in this situation they avoid using their credit card at all and wait for their credit score to slowly improve. While this may be useful if you’re an impulsive spender without the means of repayment, but a better option would be to make purchases here and there on your credit card and pay it off swiftly. Staying on top of your debt obligations will be a key part of building up your credit score.
Does a Car Loan Improve Credit?
If you get a car loan, making consistent on-time payments of that loan will show the lenders that you’re dependable. If you’re able to find a lender willing to approve you for a car loan despite your bad credit, that loan will be an effective way to build back your credit score. Being consistent with your payments makes up 35% of your credit score, a percentage that can make or break your relationship with the lender.
Your credit score is also based on your payment history, this includes how much debt is owed, whether you have revolving or installment credit, if you have new credit on file and the total length of your credit history. Your credit score is a number between 300 and 900 also known as a beacon score, this score represents your overall creditworthiness with the lender. On the scale, an amazing credit score would be 900 and an extremely low credit score would be 300. All of these factors go into making your credit score but each of them are calculated differently.
How Does a Car Loan Improve My Credit?
35% of your credit score is based on your payment history while another 30% is based on the revolving credit you're using. If you can keep up positively on these two components that make up 65% of your credit score, you should have a healthy credit rating. However, if you fail to pay your loans on time and rack up expenses you can’t pay off then your credit will take a negative hit. If you consistently miss payments and increase debts, your odds of being approved for a car loan are at a minimum.
5 Steps to Rebuilding Credit With a Car Loan
If you’ve decided to rebuild your credit score through a car loan, its important to follow each of these steps:
1. Get other credit commitments under control: Before you apply for a car loan, it’s important to catch up on your other loans and begin making payments for them. You don’t need to pay them off entirely, but be sure to make the minimum payments for any past due or overextended credit obligations.
2. Decide on and save for a down payment: If you have bad credit you’re going to need every advantage to be approved for a loan. Putting a down payment reduces the amount the lender has to loan to you and therefore better’s your odds of getting approved and getting a more favorable interest rate. Although some sub-prime customers are eligible for a zero down car loan, the interest rate will increase and your chances of being approved will decrease.
3. Be realistic about what you can afford: Before deciding on a car, understand what you can afford to pay each week or month. Do your best to keep your payments low so if you have any unexpected expenses in the future you'll still be able to pay your car loan on time.
4. Don’t apply everywhere!: Lots of people play the numbers game and send out their application to several lenders. Doing this will actually hurt your chances of being approved. Applying with Car Loans Canada will give you the best odds of getting approved as we have partners all over Canada who can work around your specific needs.
5.Keep on top of your payments: Ensure you are always paying your car loans in full and on time. Any missed payments will stay on your credit profile for seven years. If a lender sees you’ve missed payments in the past it will deter them from giving you a loan in the future.
3 Reasons to Build Credit With a Car Loan
We’re going to break down three reasons why fixing your bad credit through a car loan is a great option.
1. Car loans are easy to get approved for: Tons of Canadians have below-average credit, these Canadian’s usually qualify for what’s called a “subprime” loan. A subprime loan is a loan for anyone who has a below-average credit score. The interest rate on a subprime loan is typically higher than a “prime” loan because the risk is higher for the lender. Usually, any credit score under 670 would be considered subprime.
While many dealerships only offer prime loans, Car Loans Canada has partnerships with thousands of dealerships across the country who work specifically with the subprime market. If you fall under the subprime category, save yourself the time of searching for a subprime dealer and apply on our site so we can find the subprime dealers for you!
2. Auto loans are secured: A secured credit loan is something lenders are much more comfortable approving as it is backed by collateral, meaning if the person approved for the loan fails to make payments, the vehicle would be repossessed. Due to the decreased risk for the lenders, secured loans typically have lower interest rates. Most lenders will be skeptical of approving someone with bad credit for an unsecured loan and will therefore have a higher interest rate on that loan.
3. You need credit to build credit: In order to improve your credit score, you need to show lenders that you can consistently stay on top of managing any credit by paying bills in full and on time. Opening a new form of credit like getting a car loan while maintaining your other monthly payments shows the lender you're reliable.
As the borrower, you must not miss any payment deadlines or not pay in full if you don’t want to see your credit score go down. It is also in your best interest to keep the auto loan open for a year at a minimum, even if you have the means to pay off the loan early. Keeping the loan open shows the lender you can consistently stay on top of your payments and this will further increase your credit score.
The Downsides of Getting a Car Loan
While there are many great benefits of getting a car loan, there are also some downsides that need to be considered. Although all these risks can be mitigated if you plan and act accordingly.
The first downside to getting car financing is the risk of the vehicle being repossessed. As discussed earlier, when you get a car loan, that car is being held as collateral in case you stop making payments. Not only will this hurt your credit score but you’ll be left without a car.
The second downside to getting a car loan is that you’ll have less money for other expenditures. By allocating X amount of money per month to the loan, you’ll have less money for other expenses.
The last downside to getting a car loan is you may get charged a high-interest rate. This is more of a concern for people trying to get a loan with bad credit as the lender will only agree to a loan at a high-interest rate. If you have good credit, most lenders won’t charge a higher amount of interest.
Benefits of Using a Car Loan to Improve Credit
Using a car loan to rebuild your credit comes with other perks that aren’t mentioned enough. Obviously, the main perk would be improving your overall credit score, but these two factors also make it worth the commitment.
The first perk of getting a car loan is your ability to refinance once you’ve lowered your credit score. If you applied for a car loan with bad credit chances are you’re paying a lot of interest. So if you stay consistent with your payments, you’ll see your credit score begin to improve, and then you may be able to refinance at a much lower interest rate, potentially saving you a ton of cash!
The second perk to getting car financing is it will improve your odds of being approved for other forms of financing. As your credit score improves, you will be more likely to be approved by lenders - whether it’s for a mortgage, a personal loan, or a credit card.
Apply With Car Loans Canada Today!
If you’re in a bad credit situation, consider a car loan to improve your credit. There’s no better place to start the process than at Car Loans Canada.
First, check out our rates page to see what our lenders are currently offering. From there, go to our car loan calculator and see what you can afford to pay and how often. Lastly, go apply to our application and let us connect you with dealerships all across Canada.
