Does Financing a Car Build Credit?

Does a car loan build credit?

If you can get approved, a car loan is an effective strategy for credit building. Especially if you have bad credit. 

Making payments on your car loan helps improve your payment history, resulting in a boost to your credit score

Your credit score is based on components like payment history, how much debt is owed, the total length of credit history, what kind of credit you have (revolving or instalment), if you have any new credit on file, and your overall payment history. It is a number between 300 and 900 that represents your overall creditworthiness as a borrower.

Although all of these components impact your credit score, they’re each calculated differently. 

How do car loans build credit?

Your payment history accounts for 35% of your overall credit score, while 30% of your credit score is based on how much of your revolving credit you’re using. If you’re successful at paying back your loans, and keep a low balance on your credit card, these large percentages will have a positive impact on your score. However, if you struggle paying back your accumulated debt and can’t seem to get your payment history under control, your credit score is due to suffer. A low credit score will negatively impact your chances of getting approved for a loan in the future.

If you get a car loan with cashback, you can get another credit score boost from your car loan by using that money to pay down your credit card balance.

If you're looking for a car loan to rebuild credit, Canada Drives is the solution for you. We offer affordable financing rates to Canadians facing all types of credit situations. Get pre-approved and browse hundreds of certified vehicles today.

There are several routes to take when it comes to fixing credit. Debt consolidation, negotiating with your creditors, or planning to pay off high-interest debts first (the Debt Snowball Method), are all strategies that can help you lessen the debt load and increase your credit score. 

Advantages of building credit with a car loan 

Let's take a look at the advantages of using a car loan to build credit, how to use the loan opportunity effectively, and how Canada Drives makes it easy to get approved for your credit-building car loan.

These three reasons demonstrate how an auto loan might be your best option for rebuilding credit.

1. Auto loans are secured

Secured credit is a type of loan that is backed by collateral. In the case of an auto loan, the vehicle is the collateral which means that it can be repossessed if a borrower fails to make monthly payments in full each month. Due to this, secured loans will typically have a lower interest rate compared to unsecured loans – loans that can be approved based on the borrower’s creditworthiness without collateral. 

A lender may be skeptical approving a borrower with less than perfect credit for an unsecured loan and in return, increase the interest rates. With a secured auto loan, you’ll likely get low-interest rates with affordable payments thanks to the collateral.

2. You need credit to build credit

In order to get your credit rating back on track, you need to prove to lenders that you can responsibly manage a healthy mix of credit. Paying your monthly bills on time and in full will improve your credit score but opening up a new form of credit can add to your mix of credit and help you rebuild your score as you work to pay off your debt.

To build credit the borrower cannot miss any payments or make late payments. The borrower should also keep the auto loan open for at least a year, even if he or she has enough to pay off the loan sooner. Keeping the loan open shows a pattern of responsible payment history which is what builds a credit score.

3. Car loans are easier to get approved for

Subprime loans are available to borrowers who apply for an auto loan with a credit score that falls below average. Generally, Canadians with an overall credit score under 670 are considered subprime. 

While many dealerships can’t help subprime car buyers, there is a growing number of dealerships that specialize in subprime loans, and companies like Canada Drives who can get you pre-approved for a car loan online in minutes.

How to rebuild your credit with an auto loan

Are you ready to start improving your credit with an auto loan? These steps will help you prepare, apply, and get approved for an auto loan.

1. Get your commitments current

If the current credit you have is past due, overextended, or has been sent to collections, you need to get it under control before applying for a new car loan. You don’t have to pay it all off, but you should catch up with minimum payments for ALL your current credit obligations.

2. Save up a down payment

The lower the initial loan amount compared with the vehicle’s value, the less risk the lender has to assume. While zero down car loans are available (even to subprime car buyers), your chances of approval increase when you offer at least 10% of the purchase price as a down payment. 

3. Spend within your means

If your debt-to-service ratio is already high or if you earn a modest income, think Corolla, not Cadillac. Keep your payments reasonably low so you aren’t stretching your ability to repay. 

4. Don’t shotgun your application

A tendency is to send in a credit application to several lenders or dealers, expecting a few rejections but potentially one approval. This type of process hurts your chances all around. A service like Canada Drives can match up your application to the right lender to help you get approved for the best possible rate. 

5. Pay on time, every time

Late and missed payments stay on your credit report for seven years, and it shows lenders that you can’t be trusted to make your payments on time. Make sure that you pay your car loan on time and in full every time it’s due, without question. Avoid grace periods as well.

Get approved with Canada Drives

The right car loan will put you on the right track to a better credit score and improved financial standing. Canada Drives can help you get the vehicle you want with financing that fits your budget. Get pre-approved today (for free) to see what you could be eligible for.