Credit is king when it comes to purchasing big-ticket items such as a house or vehicle. Without a history of using credit, your chances of getting approved on your own are more challenging, but it's still possible. In fact, if you work with the right lender, a bad credit auto loan can actually help you build credit.
How Bad Credit Auto Loans Help Build Credit
Bad credit car loans are offered by subprime lenders that specialize in working through unique credit challenges. These lenders are available through special finance dealerships.
As for what a bad credit auto loan is, it’s a type of installment credit. Installment credit is when you sign a contract and agree to borrow a specific amount, and pay it back over a fixed period of time with interest.
To qualify for one of these loans, you need to meet the requirements of these subprime lenders, which you can read about here. If you don’t have a credit history, they may ask you to add a cosigner or co-borrower to the loan, but this isn’t always necessary.
A bad credit car loan can help you build credit as long as you keep up with the monthly payment. It does so by affecting these three factors that contribute your FICO credit score:
- Payment history (35%) – It’s your responsibility to make sure the car loan is paid on time each month. As you do this, you can build your credit score over time.
- Credit mix (10%) – Credit cards are a type of revolving credit, and auto loans are a type of installment credit. When you add a car loan to your credit portfolio, you diversify your credit mix.
- New credit (10%) – The auto loan is new, so it impacts this area of your credit score. Just make sure that you practice discretion when applying for credit, as applying for too many lines of credit can negatively impact your score.
3 Other Ways to Build Credit
In addition to taking out a bad credit car loan, you have some additional options to help improve your credit score. Which ones are going to work best for you depends on your current situation.
These three tips can assist you with your credit building:
- Become an authorized user – One great way to build credit is to become an authorized user on someone else’s credit card. You get the benefits of the card without actually having to use it.
- Apply for a credit card – Applying for, using, and making regular payments on a credit card account is another surefire way to build credit. You can apply for a store card, secured credit card, or traditional credit card; just make sure you can handle the monthly payments.
- Take out a personal loan – Personal or credit-builder loans give you the chance to build your installment credit experience and credit history through on-time payments.
Find a Dealership to Work With Through Us!
If you’re determined to get a bad credit auto loan to build credit, know that Auto Credit Express wants to help you get started. We’ve been assisting bad credit consumers for over 20 years by matching them to local special finance dealers.
We know how tough it can be to find financing when your credit isn’t great, and we want to take out the stress of searching for the right dealership. Fill out our free and secure car loan request form, and we’ll get right to work connecting you to a dealer near you!