When you're struggling with poor credit, it's easy to think about all the setbacks you think may happen when you try to get a car loan. But did you know that getting an auto loan can actually help improve your credit? It's true! Stop fretting and check out the benefits a car loan could bring to your credit score.
A Big Impact on Payment History
One of the main reasons an auto loan can help improve your credit score is the opportunity you have for making regular payments over a long period of time. Payment history is one of five factors that goes into your credit score, and it accounts for more than any other one. In fact, 35% of your credit score is based on your payment history.
This means that how you handle your bills – both good and bad – makes a big impact on your credit score. Missed and late payments can really knock down your score a lot, but on the flip side, simply making your payments on time does more than anything else to improve your credit score.
However, the chance to make timely payments for a number of years (car loans typically last anywhere from three to seven years) is only one way an auto loan can help.
Other Factors Improved by Auto Loans
It's not only a solid payment history that's impacted by a car loan. Of the five factors which contribute to your credit score, nearly all of them are affected when you finance a vehicle.
The five factors that combine to make or break your credit score are: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). As you can see, each of these factors has a weighted percentage attached to it that tells you how much it impacts your credit score.
When it comes to your auto loan, each on-time payment you make adds to your positive payment history and increases your high credit. Additionally, a car loan is an installment loan (like an auto loan or a mortgage), which adds to your credit mix. And the simple act of applying and being approved for the loan in the first place adds new credit.
Taking Out a Car Loan With Poor Credit
Now that you can see the benefit of making car loan payments, you need to find a lender that works with credit-challenged consumers. Not all lenders will consider you for an auto loan when your credit score is low.
However, there's a type of lender, called a subprime lender, that has the ability to work with these borrowers. Subprime lenders are third-party lenders that typically offer loans through a dealership's special finance department, and some online sites.
These lenders look at borrowers with no-so-great credit histories because they evaluate factors beyond your credit score to get a bigger picture of your situation. They look at your ability, stability, and willingness to take on and complete a car loan by asking you to meet a number of qualifications. These include, but aren't limited to, your income, residence and employment, and down payment.
Meeting a few simple requirements with documents you should already have is a small price to pay for finding a lender willing to approve many bad credit borrowers.
Need Help Finding a Dealer to Work With?
Since not all dealerships have special finance departments that work with subprime lenders, it can be hard to pick them out if you don't know what to look for. However, here at Drivers Lane, we have a nationwide network of special finance dealers that are signed up with these lenders, no telltale sign necessary!
To find a lender in your area, simply fill out our fast, free, and easy auto loan request form. Then, we'll get to work matching you to a local dealership so you can start your credit repair journey with the car you need!