January 21st, 2011
Building Credit with an Auto Loan or Car Payment
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**Today’s guest post is contributed by MoneyAisle**.
Whether you’re working on improving your credit health after a bankruptcy or just getting started as a borrower, making car payments on an auto loan is an excellent way to establish or build your credit score.
Before you take out that big home mortgage loan, business loan or finance that designer furniture set, you need to prove to lenders that you’re creditworthy.
Car loans help you do just that for the following reasons.
Auto Loans are Installment Loans
When lenders and credit reporting bureaus look at your credit history, they want to see a good mix of installment loans and revolving credit. Revolving loans include credit cards and home equity loans. Installment loans include student loans, mortgages and auto loans. In most cases, it’s not feasible (or wise) to take out a student loan, home mortgage or home equity loan simply to build your credit. It’s much easier to qualify for and pay off an auto loan, which makes it the best option for improving your credit health.
Auto Loan Refinances are Easy
As a borrower with no credit history or bad credit, you’ll pay a premium for your first car loan. Don’t be surprised if you’re hit with a double digit car loan interest rate, especially if you’re emerging from bankruptcy. But the good news is that after one or two years of making your payments on time, you can refinance for a lower interest rate if your credit score has improved (which it will have, if you haven’t done anything else to negatively impact it).
You can refinance every few years and continue to get lower interest rates until you’re no longer paying the subprime rate. This is all made possible because, unlike home mortgage loans, the origination fees and other closing costs of a car loan are typically very low and the payback period is relatively short.
Car Payments are Somewhat Flexible
As long as you avoid loans with early payment penalties, car payments are very flexible. If you get a low monthly car payment, you can elect to make extra payments or double payments whenever you have extra cash. Paying off your loan early not only saves you money on interest, it reportedly boots your credit score faster as well.
You can also put down a larger down payment from the beginning or when you refinance to get a lower interest rate.
Overall, having an installment loan in good standing on your credit history is important to establishing or improving your credit health. A car loan is one of the easiest, most affordable and most flexible installment loans you can get. Keep this in mind as you embark on the road back to good credit.
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Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.