How does an auto loan affect your credit?
When you receive the approval for your auto loan, your credit feels the effect in a number of ways.
There is a hard inquiry to your credit report during the application process that usually takes away some point from your score. This also happens when you are refinancing your auto loan.
Your credit history increases because you gain a new credit item that can have a positive effect on your credit. All you need to do is to pay promptly and in full without fail.
The few credit score points that you lose during the application should not make you worried. This is because a few months of timely payments will win you those points back and much more.
The type of auto loan you take also matters
If you are trying to use an auto loan to build your credit, be mindful of hard inquiries to your credit report. Be sure that you are ready to buy a vehicle at that time and have a shortlist of lenders before you go ahead with the application process.
All hard checks on your credit within a 30-day period usually count as one when your credit score is being evaluated. A car loan is easy on your credit rating because the amount is usually small. Be upfront with the dealership and let them know you are looking for a convenient loan and the best rates possible.
This helps to reduce your monthly payments. While longer terms will mean lower monthly payments, you are also paying more in interest.
Tips for building your credit with an auto loan
Here are some tips that will help you to get the best results from your auto loan.
1. Clear all outstanding debt
If you want your auto loan to help your credit score, you have to help yourself by ensuring that any current credit that you have that is late or past due, or under collections is paid off. If you are unable to pay it off completely, reach out to the party in charge of the credit and ensure there is a plan to get it right.
When all your minimum payments are up to date, your credit score will see the benefits of prompt payments of your auto loan.
2. Make a down payment
You can easily get an auto loan with zero down in most cases. If the vehicle isn’t too expensive, you can walk away from the dealership without paying a cent. However, this could make your monthly payments high when all add-on and extra payments are included. The smaller the loan you take, the less risky the loan is.
Making a down payment increases your chances of getting your auto loan approved. It also reduces the amount of money you repay each month which makes it more convenient for you. Having a down payment also makes it easier for you to negotiate with your dealership or lender for a better loan package.
3. Keep an eye on your personal budget
There is always the temptation to buy the most expensive car you can be approved for or your dream car even if it is too expensive for you. Choose a car that is within your financial capacity and budget so that making the monthly payments will not be stressful.
You must ensure that you do not exceed around 15-20% of your income on a new car, especially if you are paying rent and other things. Live within your means and spend accordingly if you want your credit score to improve over time.
4. You MUST never be late on payments
Every late or missed payment will be on your credit report for up to seven years. Every time a lender looks at your credit history, they will get the impression that you are not dependable to make payments when due.
Try as much as possible to pay a few days before due dates. This helps to avoid last minute emergencies that could cause late payments. Pay no attention to grace periods so that you don’t become complacent with your payments.
5. Pay above the minimum
Whenever you can, you should pay more than the minimum payment. Your auto loan has a fixed amount that you have to pay. Paying more than that shows your financial responsibility. It also helps you to reduce the term of the auto loan and get out faster.
Fixing bad credit is a long, arduous journey that requires discipline. You must be diligent and willing to listen to financial experts when they advise you. If you need to, set a reminder on your smartphone for your loan repayment day and make sure you also have the funds available as at when due.
Defaulting on an auto loan puts you at risk of your car being repossessed by the lender. Pay your auto loan in time and you’d be sure to have a faster and simpler process for your next car.
Vehicle Auto Finance believes that all Canadians should be able to have fair interest rates and low monthly payments on auto financing regardless of credit history. For more information on auto financing visit our blog or click here for everything you need to know about auto financing. Want to use our service for free? Get pre approved here.