Is a Car Loan a Good Way to Build Credit?
Trevor Mahoney is a financial services writer and content creator based out of Los Angeles, California. He holds a Bachelors of Science in Finance from Santa Clara University. In his free time, he enjoys hiking and lounging on the beach.Read full bio
At a Glance
Out of all the potential loans a person may take on in their life, one of the most common is an auto loan. Driving is a part of everyday life for many people around the world, but acquiring a vehicle is extremely expensive. With the average price for even a used car being tens of thousands of dollars at a minimum, a person needs to borrow money to make the purchase. This new auto loan can then affect a person’s credit for better or worse.
In this article, you’ll learn:
How do car loans work?
For those unfamiliar with the structure of car loans, there are three main factors: the loan amount, the APR, and the term of the loan. When you wish to purchase a car you will go to a lender, typically a bank or dealership, and request an auto loan. If granted, the lender will provide you with the lump sum of money you need to purchase the vehicle you seek.
After you make the purchase, you will be responsible for monthly payments that include any fees along with the APR you agreed to when you accepted the funds. This monthly payment will continue until the term of the loan is complete. Auto loans typically have terms of five to seven years, on average.
Related: Personal Loan Vs Auto Loan
Auto loans on your credit report
When considering the question of does a car loan build credit or how fast a car loan builds credit, the answer starts with looking at your credit report. The minute you sign the contract and receive your loan, it will be reported to the credit bureaus. The amount you have outstanding on the loan and a history of your payments will all be recorded in your credit report.
How does a car loan build credit?
With the understanding that an auto loan is reported to the credit bureaus and on a person’s credit report, it’s worth covering how that loan builds credit. Specifically, when looking at does paying a car loan builds credit, your credit score is bolstered with every single on-time payment that you make, as it contributes to your overall payment history. Additionally, considering an auto loan is an installment loan, your credit score will be bolstered by the fact that it is a different credit type.
Can a car loan hurt your credit score?
As you look at the question of do car loans build credit or can you build credit with a car loan, it’s also true that an auto loan can hurt your credit score. If you miss payments or make late payments, it will negatively impact your credit score very quickly. That’s why making on-time and in-full payments on your auto loan is so important.
Does paying off a car loan help build credit?
When looking at how much a car loan builds credit a person may be wondering how paying off the loan will impact their credit. In particular, paying off a car loan will help your credit score as it will stay on your credit report for several years. However, as an inactive credit account, it will not have as strong an impact as it would if you were still making payments on it.
Related: Does Paying Off a Car Loan Early Hurt Your Credit?
Is a car loan a good way to build credit?
Taking on a car loan is certainly a good way to build credit while also gaining access to your very own car. However, given the size of a car loan, it can have serious impacts on your credit score if you default on the loan. Therefore, start with smaller forms of debt such as credit cards when you are just starting so that you can get used to making payments to a lender.
What to do if you’re struggling to make car payments?
For many people, the large payments associated with an auto loan can quickly become overwhelming depending on life circumstances. If you are struggling to meet car payments due to a high-interest rate you were given when the loan was underwritten, consider refinancing the loan if you are in a more favorable position financially now. Alternatively, consider trading in your vehicle or selling your car if the situation becomes dire.
In looking at does a car loan help build credit, you may be wondering how long it will take to see the benefits on your credit report. Once the loan is approved and released, it will appear on your credit report and start benefitting your score. It generally will start reflecting on your credit score at the next date of calculation. Before ever looking at does having a car loan build credit, you will need to qualify for purchasing a car through a loan. It is generally recommended that a borrower have a credit score of at least 660 when they apply for an auto loan. The choice of how long a car loan lasts is up to the lender, but the most common loan terms are for five to seven years on average.
In looking at does a car loan help build credit, you may be wondering how long it will take to see the benefits on your credit report. Once the loan is approved and released, it will appear on your credit report and start benefitting your score. It generally will start reflecting on your credit score at the next date of calculation.
Before ever looking at does having a car loan build credit, you will need to qualify for purchasing a car through a loan. It is generally recommended that a borrower have a credit score of at least 660 when they apply for an auto loan.
The choice of how long a car loan lasts is up to the lender, but the most common loan terms are for five to seven years on average.