skip to content Canada Drives

How Car Loans Help Build Credit

When a person has bad credit, there are a number of ways to help rebuild it. Here's why car loans are a great way to improve your credit score.

Multiple factors impact a credit score. The number between 300 and 900 that is listed on your credit report represents your overall creditworthiness as a borrower. 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 – is it revolving or installment – if you have any new credit on file, and your overall payment history. Although all of these components impact your credit score, they’re each calculated differently. Your payment history takes up 35 per cent of your overall credit score and 30 per cent of your credit score is the amount of debt you owe. If you’re successful at paying back your loans, these large percentages shouldn’t have a negative 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 can impact whether or not you’re approved for a loan in the future.

There are a lot of routes a person can take when it comes to fixing credit. Debt consolidation, negotiating with your creditors, or strategizing to pay off high interest rate debts first are all strategies that can help you lessen the amount of borrowed money that you owe and increase your credit score. Rebuilding credit takes time and persistence but opening up a new line of credit is tactic that can help a person fix their credit quickly. New credit on a credit report takes up 10 per cent of your credit score. This might not seem like a lot, but it snowballs into every other category of your credit report based on how you manage it. If your credit isn’t the greatest, taking out an auto loan can help you rebuild your score as lenders work with people who are facing all types of credit situations. Here are three reasons 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 seized if the 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.

  1. You Need Credit to Build Credit

In order to get your creditworthiness 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 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.

There are several factors to consider when deciding to take out an auto-loan. The borrower should have a reasonable monthly income to support the monthly auto-loan payments. If the auto-loan payments are less than 18% of gross monthly income, the borrower is more likely to stay on budget and make reliable payments. Additionally, the loan amount should be substantial enough to give the bank something to go off of when they review payment history. An amount over $8000.00 would be ideal. To build credit the borrower cannot miss any payments or send in 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.

  1. It’s Easy to Get Approved

Dealerships across Canada can work with individuals with varying credit scores. Subprime loans are available to those who are applying for an auto loan with a credit score that falls below average. Canadians with an overall credit score under 670 are generally considered subprime. Canada Drives is partnered with hundreds of car dealerships all across the country and has helped thousands of Canadians with low or no credit score find affordable auto financing that can help rebuild credit. Free online programs like Canada Drives were invented to help people get the vehicle they want at a price that fits within their budget.

There’s no doubt that rebuilding credit takes hard work and practice, but consistent loan payments and ensuring that you have the right mix of credit will put you on the right track to a better credit score in the future.

Visit Canada Drives today to apply for free and start rebuilding your credit with a car loan!


Apply for Your Car Loan

Your online application takes only 2 minutes to complete and we only ask for information we actually need.

Get approved today

Or feel free to call us at 1-888-865-6402