Your credit score plays the main role in your financial life. A good credit score can open many doors in terms of financing, but a bad score can do the total opposite. Building and maintaining a good credit score is something you should target to ensure a healthy financial profile, and an auto loan may be able to help you do that.
The question is, how exactly can an auto loan influence your credit score?
How Can a Car Loan Help Me Rebuild Credit?
Prior to getting into how a car loan can help you get your credit score back up to where it should be, it’s important to understand exactly what makes your credit score:
Credit mix –The10% of your credit score is credit mix, which refers to different types of accounts that are on your credit report. These include credit cards, car loans, student loans, and mortgages.
Debt load – Second to your payment history is your credit utilization. Specifically, the amount of debt that you carry related to your income matters a lot when it comes to your credit score. So does the amount of credit that you use relative to how much you are allowed. This accounts for 30% of your credit score. If you max out your credit, doing so affects your credit score.
Length of credit history – The length you’ve been a credit account open has a weight of 15% on your credit score. It’s not as much weight is given to this compared to payment history or debt load, it still matters. In general, the longer these accounts are active, the better for your credit score.
New credit – Having your credit checked to open a new account can pull your credit score down, even though temporarily, and also makes up 10% of your credit score.
Payment history – Your payment history has the biggest impact on your credit score. More specifically, because it makes up 35% of your score. That means having a history of missed payments will have a bigger impact on your credit score compared to any other factor. If you’ve had a habit of not making your bill payments on time, This may harm your credit score badly. On the other hand, making timely payments can be very good for your credit score.
A car loan may have both a positive and negative effect on your credit score based on the criteria mentioned above. When you apply for a car loan, your score may be affected a bit because you’re taking out new credit. When a lender reviews your credit report after you apply for a loan, this is what’s known as a “hard inquiry” and can harm your credit score, this only temporary.
But once you have been approved for a car loan, timely payments that you make can be a very good thing for your credit score. Adding to the mix of credit on your report can also be a good thing for your overall score.
How to Use a Car Loan to Rebuild Credit
If your credit score is already in despair, a car loan may be able to help you rebuild your credit, as long as you adopt certain habits and ditch others.
Your payment history makes up 35% of your credit score. If you consistently pay your car loan on time, this can have a positive effect on your score. On the other hand, missed to repay your auto loan, your credit score will suffer. This may lead you to have a poor credit score.
It is best to make sure that you take out a car loan amount that your current finances can comfortably handle. You don’t want to get a loan so high that you will barely be able to cover payments. Keeping up with bill payments is the best way, so getting an auto loan that is within your financial means is very important to rebuilding credit.
Again, adding another line of credit to your credit report in the form of a car loan can also positively impact your credit mix, which plays a role in your overall credit rating. Ideally, you want to have a mixed account on your credit report, including installment loans like car loans, as well as revolving debt like credit cards.
Benefits of Using a Car Loan to Rebuild Credit
When you use a car loan to rebuild your credit comes with certain perks. Of course, the biggest advantage is rebuilding and increasing your credit score. With you making timely payment that you make, you’re inching your credit score back up to where it could and should be.
Also, you can take advantage of a couple of other benefits:
When your score improves refinance at a lower rate. With a low credit score, it is difficult getting approved for a loan. But even if you do, it more likely to get offered a higher interest rate on the loan than you would with a higher credit score. But, if you’ve been diligent about repaying your car loan, your credit score can see a major boost after a few months, you may be able to secure refinancing at a lower rate.
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 may help open up the doors to other loan products too. Different types of 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
We know that there are some benefits to having a car loan. there are also disadvantages associated with car loans.
Repossession risk. When you take out a 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 to recover their losses. That means not just your credit score suffer, but you’ll be without a car, too.
High-interest rates. If you have a poor credit score, the interest rate you have will likely be pretty high which makes your car loans very expensive. You’ll be paying a more toward interest than you need to be.
Money is tied up. By taking out a car loan, you will be dedicating more of your income toward this new debt, leaving less money leftover for other expenditures.
Rebuilding Credit with a Car Title Loan
A car title loan is a type of financing option that provides you with the cash you need in a lump sum against the title of your car. The title of your vehicle – or ownership – is being used as collateral to secure the loan. With this type of arrangement, you would surrender the title of your loan and put a lien on it until you complete the repayment period.
Here are some perks to 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 face difficulty getting approved for a traditional loan. By doing so, this will help you rebuild your credit score.
The car serves as collateral. Car title loans are relatively easy to get approved for because they are secured loans that use the car title as collateral. Having 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 easy to process, meaning you can get your hands on the money you need quickly, which can come in handy when you have a financial emergency to meet.
Help improve your credit. If you pay on time 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 can be used to consolidate your debts. This makes sense if you have any high-interest debts, and the rate that you are given with a car title loan is lower. This can help you save money and make managing bill payments easier.
Having a car loan may help you rebuild and improve your credit scores. Paying your car loan promptly may help your credit fix in case of having a poor credit score. However, if you are looking for a car loan, but you have poor credit, Credit repair in Canada like credit repair now may help you fix your credit score with their credit repair service. Contact us now and we can help and guide you to fix your credit score.