If you have bad credit and need a vehicle, a credit builder car loan allows you to get the wheels you need and the chance to improve your credit score. All you have to do is make all of the payments on time, so making sure your auto loan is affordable is important.
Does a Car Loan Build Credit?
A car loan can help you raise your credit score for two main reasons that have to do with two of the five factors that make up your FICO credit score:
- Payment History: Your payment history makes up the largest part of your credit score – 35 percent of it according to FICO. This factor looks at past and current payment behavior on credit cards, loans, and other accounts. Making on-time payments on your accounts is the best way to build credit, which is why a car loan is an excellent credit builder.
- Mix of Credit: Having variety in the types of credit you use and have used is another component of your credit score. FICO says your credit mix makes up 10 percent of your score. There are two main types of credit accounts: revolving credit, such as credit cards, and installment credit, such as a loan or mortgage. An auto loan falls under the installment category, so it can add variety to your credit mix and help you improve your credit scores if you pay it back responsibly.
If you have poor credit and need a vehicle, you could try to pay cash for car to avoid trying to get auto financing. However, you would miss out on all of the credit building benefits of a car loan.
How Fast will a Car Loan Raise My Credit Score?
Building good credit is like a marathon – it takes time, effort, and determination to achieve. A car loan can raise your credit score, but it's a slow build accomplished through months and years of on-time payments while keeping up with your other bills.
Therefore, you're going to want to plan out your purchase to make sure you don't overextend yourself and your payments fit well within your budget. Here are some tips to consider if you need a credit builder car loan:
- Budget: Plan out your car buying budget by taking a close look at what you spend each month compared to what you make. A good tip is to try and spend less than 10 to 20 percent of your monthly budget on all of your car expenses, including fuel, insurance, and upkeep.
- Finance an Affordable Vehicle: After you have an idea of a payment that fits your budget, make sure to stick to it. A credit builder auto loan isn't the time to get the car of your dreams. Think affordable, practical, and reliable while you work to improve your credit by making payments on time.
- Have a Down Payment: Another great reason to plan ahead is that it gives you time to save up for a down payment. Having money to put down on a car can help you get approved when you have less than perfect credit. A down payment can also reduce the amount you have to finance, which lowers your monthly payments and the interest charges you end up paying.
The Bottom Line
Focus on making all of your monthly payments on time, and you can improve your credit with an auto loan. If you have bad credit and need a car loan, Auto Credit Express is here to help.
We connect car buyers to dealerships in their area that specialize in helping people with imperfect credit get into new and used car loans. Our service is free of cost and obligation. Start with confidence by submitting our auto loan request form today.