Navigating life with bad credit is never ideal. For this reason, when an opportunity to improve your credit score pops up, it’s best to grab it right away. If you’ve been down with bad credit and are looking for a way to improve things, getting auto financing can be your ticket.
An auto loan is definitely a good way to build credit if you can get approved—especially if you have a poor credit history—as on-time payments account for 35 percent of your credit score. This makes it extremely beneficial in establishing lender trust.
The following paragraphs provide you with procedures that will assist you in preparing for a car loan, applying for one, and receiving approval.
Get Your Current Credit Under Control
You must get your current credit under control before applying for a new car loan if it is past due, overextended, or has been sent to collections. You don’t have to pay it off completely, but you should make minimum payments on all of your present debts.
Put Money Aside for a Down Payment
If your lender has less risk to assume, that means you have a lower initial loan amount compared to the vehicle’s value. While zero-down vehicle loans are available, offering at least 10 percent of the purchase price as a down payment increases your chances of approval.
Try to Be Practical
If your debt-to-income ratio is already high or you have a low income, choose a cheaper car rather than a luxury brand like Cadillac. You can also maintain a reasonable payment schedule to avoid overstretching your ability to repay.
Avoid Sending Out Applications to Every Lender You Can Find
A common practice is to submit a credit application to a number of lenders or dealers, anticipating a number of rejections but possibly one approval. However, in your situation, this type of procedure is detrimental to your chances in every way.
You can, instead, look for a service that can match your application with the correct lender, allowing you to get approved for the best rate possible.
Remember to Pay on Time
Late and missed payments show lenders that you can’t be trusted to make your payments on time, and they stay on your credit report for seven years. Ensure that you pay your auto loan on time and in full each and every time it is due to prove that you’re capable. You should also avoid taking advantage of grace periods.
Be Patient When Anticipating An Improve Credit
After reading what getting an auto loan can do to improve your credit score, you may have excitedly followed each guideline in this article and expected to see an improvement in your credit after a few payments. Unfortunately, that is not always the case. A new car loan will more likely hurt your credit score at first, but don’t let it discourage you! This is just another challenge you need to overcome on your way to fixing your credit.
This negative scenario is temporary. See, opening a new credit account has different consequences based on your credit history. Credit scoring models may interpret a group of inquiries as a single set for credit scoring purposes if you have applied for many car loans in a short period of time.
The good news is that you will have an established account with a payment history after a few months of making payment. This is where the negative effect turns into a hopeful note. Because of your new on-time payment history, the negative effects of the new account may convert into a benefit. Just make sure you send your payments on time! Else, you will lose this positive streak.
Gauging How Long Your Car Loan Affects Your Credit
The car loan will appear on your credit report for the duration of the loan plus an additional ten years. For example, if you have a 10-year auto loan, your credit will be affected for a total of 20 years. This may seem daunting. However, if you’re faithful with your payments, you won’t have to worry so much.
Because vehicle loans and other forms of borrowing remain on your credit report for such a long period, it’s vital to make on-time payments every month. A single missed payment may not cause significant damage to your credit, but it will stay on your report for the next ten years. You don’t want that kind of hassle in your credit history after all this effort, right? That’s why you must do everything you can to be prompt with your payments.
Bonus: Benefits of a Car Loan for Credit Building
These reasons show why auto financing may be the best option for repairing your credit.
- They are secured: A secured credit loan is one that is backed by a piece of property. The vehicle is the collateral in the event of an auto loan, which means you can lose it if you fail to make monthly payments in full each month.
- They’re easier to get approved: Borrowers who apply for auto financing with a credit score below average may qualify for subprime loans. Canadians having an overall credit score of less than 670 are classified as subprime. While many dealerships are unable to assist subprime auto purchasers, an increasing number of dealerships specialize in subprime loans.
Remember, you can’t miss or make late payments in order to earn credit. It doesn’t matter if you have the money to pay off the loan sooner; you should keep the auto loan open for at least a year. This is because keeping the loan active demonstrates a record of timely payments, which helps to develop a credit score.
It’s also important to be discerning in choosing your car loan because the right one will set you on the path to a higher credit score and a better financial situation. To be sure you’re in reliable hands, carefully select your auto loan company. Look for the company that can assist you in getting the vehicle you want with financing that meets your needs.
You can turn to Get Approved Canada for your auto financing. We are your Canadian loan specialists who are always ready to help from coast to coast. Book an appointment today to consult with our team about your next auto, personal, or mortgage loan!