Did you know that a car loan can help you build credit? Making routine payments on time shows lenders that you're trustworthy... Your payment history accounts for 35% of your overall credit score while 30% of your credit score is based on much of your credit you're using.
If you can get approval, a car loan is an effective strategy for credit building. Especially if you have bad credit. This is because consistent on-time payments account for 35% of your credit score, making them extremely helpful in building trust with lenders.
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 installment), 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.
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.
Factors that determine your credit score as per the FICO credit scoring system
If you're looking for a car loan to rebuild credit, Canada Drives is the solution for you. We work with car buyers facing all types of credit situations. We connect bad credit customers with great vehicles and affordable financing that will help get your credit back on track.
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.
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.
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.
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.
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 Canada Drives is connected to nearly all of them.
If you have less-than-perfect credit, you can save a lot of time and frustration hopping from dealership to bank to private seller. Apply with Canada Drives, and we’ll connect you with a local dealership that can deliver a reliable vehicle with affordable auto finance.
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.
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.
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.
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.
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 dealership in your area.
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.
Canada Drives is here to help people get the vehicle they want at a price that fits their budget.
Canada Drives is partnered with hundreds of car dealerships all across the country and has helped hundreds of thousands of Canadians with low or no credit scores find affordable car loans.
The right car loan will put you on the right track to a better credit score and improved financial standing. Apply with Canada Drives today to apply for FREE and see what you could be eligible for!
Your online application takes only 3 minutes to complete and we only ask for information we actually need.
Or feel free to call us at 1-888-865-6402