Establishing and maintaining strong credit is essential for your financial well-being in Canada. A robust credit profile gives you access to favourable interest rates, increased borrowing power, and better loans, making it a powerful tool to have in your financial arsenal.
While there are several ways to build credit, most Canadians often overlook using car loans. Here's a detailed guide on how a car loan can impact your credit score in Canada.
How Car Loans Build Credit
Your loan payment history accounts for 35% of your credit score. 30% accounts for how much revolving credit you're using. Borrowers who successfully repay their loans and keep a low balance on their credit cards have a more favourable credit score. The vice versa is true for borrowers struggling to repay accumulated debt.
Car loan payments help you build credit, especially if you use the loan opportunity effectively. Here are some top reasons why you should build credit with a car loan:
- Auto loans are secured
- Borrowers need credit to build credit
- It's much easier to get car loans approved
How to Rebuild Credit With an Auto Loan
This segment highlights critical steps Canadians can use to prepare, apply for, and get approved for auto loans.
Save up a Down Payment
The lower your initial loan amount compared to the car's value, the less risk your lender will assume. While dealerships offer zero down car loans, your chances of getting an auto loan approval increase if you offer at least 10% of the vehicle's purchase price as a down payment.
Get Your Commitments Current
It's vital to get your credit under control, especially if your current credit is past due or overextended, before applying for a new auto loan. You don't necessarily have to pay for the entire loan but try to meet all your current credit obligations.
Pay on Time, Every Time
Missed and late payments are recorded on your credit report for up to seven years. They show lenders you can't be trusted to make payments on time, discouraging them from offering you more loans or doing so at increased interest rates. As such, we advise borrowers to make car loan payments on time and in full. Avoid grace periods and last-minute payments.
Don't Shotgun Auto Loan Applications
Most borrowers tend to send their credit applications to several dealers and lenders, expecting at least one potential approval. This strategy hurts your chances of getting your loan approved all around. Instead, look for the right lender who can approve your application at the best possible rate.
Does an Auto Loan Build Credit?
Yes, if you can get your auto loan approved, it's an effective strategy for building credit, especially bad credit. Regular, on-time payments reflect your overall payment history, reflecting positively on your creditworthiness as a borrower. Take advantage of FFUN credit products to help improve your credit rating using a car loan.
