How Auto Loans Can Improve Your Credit Score



Cars may be more expensive than most people’s six month income, but the good news is that getting that expense financed can help you out a lot down the road. In fact, cars lie in a perfect price range to help people build credit without high barriers to entry.

Financing a car is much more practical than smaller purchases like furniture and more affordable than homes or business loans. People with below average credit can work their way towards bigger purchases and better credit availability as a result of paying off their auto loans gradually.

Here is how:

Auto Loans Create Their Own Collateral

Many people have difficulty asking for a loan for home improvement or to get through tough times because they do not have much collateral to offer. People who rent and who do not have significant savings or investments often have little to bring to the table as far as lenders are concerned.

With a vehicle purchase, the vehicle itself is the collateral. People can secure the loan using the car and enjoy benefits such as lower interest rates, more flexible terms and payment options compared to an unsecured loan.

Making Loan Payments on Time Builds Credit

Auto loans are installment loans, which means they are paid back in preset increments. Unlike revolving credit loans, which grant lump sums up to a limit and only require minimum monthly payments, installment loans have a preset payback time that keeps the loan-holder on a steady track to paying it off.

Every single time you make a car payment on time, you are helping your credit rating improve just a little. At the end of a 1-5 year loan, the person making payments will have built quite a dependable credit history. Even better, credit bureaus want to see a mix of revolving credit and installment loans, and auto loans are arguably the easiest and most practical installment loans to procure.

You Can Refinance Later and Make Paying the Loan Even Easier

Chances are, if you have bad credit or limited credit your first car loan will be stricter than usual. Expect higher interest — possibly even in the double digits — and origination fees.

However, after one or two years of making timely payments, you have built up a more solid credit history and have likely increased your score. You can then refinance your existing auto loan for a new one with much lower interest and friendlier monthly payments. You can even fast track your loan to get paid off in a shorter amount of time, assuming your financial situation has improved.

Car Payments Are Much More Flexible Than Other Loans

As long as you do not get a loan with early payment penalties, you will be able to pay your car off largely on your own terms. Securing low monthly payments and then adding any extra cash can reduce the life of the loan more quickly and can often help you avoid paying a portion of the interest.

With refinancing, you can also readjust the loan to lower your payments or even raise them in exchange for a lower interest rates. These options make a car loan much more flexible than something like a mortgage or student loans.

To find a loan that is right for you or to learn more about auto loans, visit our bad credit auto loans page.


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