Repairing Bad Credit With a Car Loan
If you recently filed for bankruptcy, you may wonder whether a car loan can help you repair bad credit.
But is it a viable option?
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation
How A Car Loan Helps Repair Bad Credit
Many people assume that they should avoid taking out loans after bankruptcy so that their finances can recover.
But it turns out that taking out manageable credit products, like car loans, is one of the best ways to improve your rating.
When rating agencies calculate your credit score, they not only take your bankruptcy or consumer proposal into account but also any loan repayments you make after discharge.
Thus, showing creditors that you can reliably repay money helps to re-establish your creditworthiness and restore your financial affairs to normality.
So making the occasional purchase on credit can help actually improve your situation.
Furthermore, credit rating agencies take into consideration the different types of credit facilities you use when calculating your score.
For instance, borrowers who maintain a diverse mix of credit products – such as car loans and credit cards – typically have higher scores than those who do not.
Hence, taking out a car loan while making small payments on your credit cards can help to boost your credit rating.
The type of credit you use determines approximately 10 percent of your overall score.
Diversifying can significantly improve bad credit, as long as you pay the installments on time.
The Minimum Credit Score Required For A Car Loan In Canada
Car loans can repair bad credit, but you still need a minimum credit score to obtain one.
Typically, most lenders will ask for credit scores above 650 to give you credit for a car, with some agreeing to lend with ratings above 630.
If your credit rating is lower than this threshold, you may face higher rates or the lender could refuse to give you money outright.
Those with low credit ratings don’t necessarily need to give up, though.
While mainstream banks may refuse to provide you with credit, alternative lenders may still approve you.
Finding alternative sources of finance can be a challenge, but as long as you keep searching, you can often find options that suit your situation, even if that means taking out a smaller loan.
You can, of course, improve your credit score before you apply for finance, by doing simple things, such as paying off your existing debts and making consistent payments on other forms of credit.
These tactics can give your score a nudge in the right direction, helping you get more favourable terms when eventually apply.
Saving up money for a large down payment can also help considerably towards securing a car loan.
Offering the dealership more than 20 percent of the value of the vehicle in cash is a sign that you’re solvent and able to save consistently.
Where possible, try to negotiate with different lenders.
Most creditors will want to win your business with attractive rates.
Compare various providers and then use that as leverage to get the best deal you can.
Is Getting A Car Loan A Good Idea To Repair Your Credit Score?
When you take out a loan and make successful repayments, that contributes to your credit score.
But car loans could be a risky way to improve your rating.
And if you cannot repay on time, you may do your rating more harm than good.
When taking out a car loan, you need to be sure that you have the means to pay it back.
Double-check that you can afford the monthly payments.
If you can’t, you will need to save up for a larger deposit or choose a less expensive vehicle.
Don’t fall into the trap of believing that it is the only way to improve your credit score.
There are plenty of other options.
Get Help With Bad Credit Today
In summary, car loans are a tool that some people use to repair bad credit and re-establish their creditworthiness.
Because they add to your credit mix, they can be a powerful tool to boost your score following a bankruptcy or if you have a checkered credit history.
Overdue debt, however, is a considerable burden on your credit score, especially if you’re struggling to make regular repayments, so clearing this first should be your priority.
The good news is that you don’t have to go it alone: you can get help from debt relief services.
