Does Financing a Car Help Build Credit in Ontario?

Most people are aware that having a good credit score is highly recommended when buying a car, but that doesn't mean some people with bad credit don't need a car right away! So, not the question becomes does financing a car help build credit score? Does the loan start repaying you by raising your credit score as soon as you are approved for it?

Maintaining any debt, including a car loan, can raise your credit score. Believe it or not, a car loan is one of the best ways you can build credit!

How Does Financing a Car Help Build Credit?

The number of lenders who will cooperate with you and the interest rate on the loan will both depend on your credit score. A few timely payments after receiving the loan will gradually start raising your score.

Gives You Credit History

A credit score is largely based on a person's payment history. Your score will rise as you consistently pay off more debt. This is precisely how obtaining auto finance enhances credit.

Even though it can be challenging, getting approved for a car loan with little or no credit history is not impossible. Your credit will improve if you are approved for a low-credit vehicle loan and make your monthly payments on time.

These vehicle loans may have a reputation for having hefty interest rates, and that's not entirely untrue. You are viewed as a high-risk borrower because you have little or no credit history. Lenders must therefore charge slightly higher interest rates than a bank would to protect their investment in you.

Having said that, you can trade in or sell your car and qualify for a new loan after you pay off this one and demonstrate that you're a good borrower. You'll probably be eligible for a reduced interest rate and keep raising your score.

Experian estimates that your payment history may account for 35% of your credit score. That is how much paying on time might effect the score if you want to raise it or want to know how a car loan affects it.

You can see how crucial it is to keep up with payments when you consider that the amount owing makes up 30% of the credit score, which is the next biggest component.

In light of this, you have two very basic tools at your disposal to make sure you never forget a payment.

Automatic payments: The best course of action is to set up automatic payments when accepting the Burlington auto loan. This is the simplest approach to always pay on time, provided that you always have enough money on hand or an overdraft to make the payment.

Payment reminders: You might also set an alarm on your phone, a calendar alert on your office computer, or any type of reminder in a place where you frequently are. Although it isn't as successful as automated payments, it is still a great alternative.

Early Car Loan Repayments and Credit Scores

What impact does early repayment have on your credit score if making on-time auto loan payments improves it? Here is when things start to get a bit tricky.

Complete loan repayment establishes your low-risk status as a borrower, giving lenders peace of mind when you apply for another loan.

Your debt usage ratio, or how much of your available debt you are utilizing, decreases as the loan is repaid.

You might discover, nevertheless, that paying off the loan early significantly lowers your credit score. if not immediately.

This is due to the fact that the credit mix contributes to the score as well. You have a range of debts, including loans, credit card debt, student loans, and more. Your credit score may be somewhat lowered if your mix is limited. It just does; we're not sure why.

Your financial condition should be improved, not your credit score, when you pay off your auto loan early. A benefit is having extra cash available at the end of each month. Another advantage is not having additional debt to worry about.

If you're ready for a car loan, we'd love to help with that! simply fill in the form below to get started.