Will a Car Loan Help Me Rebuild My Credit?

In our recent post, 4 Reasons Why You Can’t Get a Car Loan, we listed “bad credit” as the number one reason. But will getting a car loan help improve your credit?

Rebuilding from bad credit is a process. Easy ways to improve your credit are hard to come by. It’s much easier to dig yourself a hole than to get out of it, but at least there are some proven methods you can use. Getting a car loan is one of them.

Types of Credit

When you’re rebuilding credit, or if you have no credit and are trying to establish yourself, a variety of types of credit can help you create a profile of a responsible borrower. These are all valuable in terms of building a good credit score:

  • Revolving accounts (credit cards are one)
  • Open accounts (utility bills are an example)
  • Installment accounts (such as loans)

Why Get a Car Loan?

An auto loan is of particular value. It is generally one of the biggest – if not the biggest – lines of credit most people have. That alone gives it weight. It is a significant financial commitment and creditors view it as such. The good news is that, unlike some other types of loans, a car loan is secured, meaning there is an asset (the car) that protects the lender. If the loan isn’t paid, the lender can repossess the car and sell it to recover part of the loan.

But Can I Get Approved?

How easy is it to get a car loan with bad credit? Much easier than it was five years ago. The safety of the investment – because it’s backed by real property – has made it much more attractive to lenders than other types of loans, so they have loosened standards and opened credit to many people that wouldn’t qualify just a few years ago.

Now, deciding whether buying a car is the best way to help rebuild (or build) your credit is something else entirely. In many cases, catching up on delinquent accounts or even paying them off is a better first move. If you’re not desperate for a new set of wheels, concentrating on past due balances could provide more benefits more quickly, and even help secure a lower interest rate when you do apply for a car loan. And that’s kind of the whole point of rebuilding credit: reaping the benefits of having a higher credit score.