Does Financing a Car Build Credit?

Financing a vehicle might be a bit more complicated – and costly – if you have no credit history or struggle with poor credit. That doesn’t mean it’s impossible. When it comes to building up a mix of credit and balancing your credit utilization, there are many factors to consider before you jump into a long-term contract. 

For example, you’ll want to make sure you’re buying at the right time, getting the best deal, and working within your budget. Not sure what you can afford? Use the Aqqru car calculator to help you find a workable car budget–instantly!  

Today, we’re going over how an auto loan can impact your credit rating, what to expect, and alternative ways to improve your credit.

Car loans and credit score 

Practicing responsible borrowing along with making your car payments on time will indefinitely improve your credit score. Read on to find out how financing a car can build your credit and when you should expect to see progress. 

What type of credit is an auto loan?

An installment loan is borrowed money with regularly scheduled payments paid back over a specific period until the loan is paid off.  Each payment includes a portion allocated towards the principal balance and another portion for interest. 

An example of an installment loan is an automobile loan. Installment loan payments can help improve your credit when you make your payments on time and in full. Whether you buy a new or used car, figuring out what you can afford and budgeting is vital, or you risk falling behind on payments and negatively impacting your credit score or having your car repossessed. 

Do auto loan inquiries impact credit score? 

While you’re shopping around for vehicle and financing options, you’ll be required to run your credit. Multiple inquires within 14-45 days generally only count as a single hard inquiry, depending on the credit scoring model used. 

How long does it take for car payments to improve credit?

There’s no specific amount of time in which you will see improvements in your credit rating. As long as you make your payments on time, you could start seeing improvements within a few months.  

Pro Tip: Ask your bank to set you up with micropayments or bi-weekly payments on auto-pay. Let’s say your monthly car payment is $200, have your bank split that into two payments of $100. 

Make one $100 payment two weeks before the monthly due date and the second on the due date. In a year, you’ll be ahead by at least a month–or more if you throw a little extra on it. This will speed up paying your loan off and knock off interest. 

Does getting a car loan drop your credit score?

Credit utilization is the ratio of debt to total credit available and this number plays a critical role in why you might see a drop in your score when you get a new auto loan. A general rule of thumb is to keep your overall credit utilization below 30%.

Hard inquiries to your credit score will drop your credit rating temporarily, but as long as you stay on course with your payments and other debts, you should see an increase fairly quickly.

Should I pay off my auto loan early?

Paying off any debt on time or early is always a good idea, but you want to keep a balanced credit ratio and a variety of credit mixes. The more diverse the credit mix and stable credit history you have, the higher the score. 

Beware that some lenders will charge you for early pay-off penalties. Call the lender who carries the loan and find out how much you’d be paying in interest until the loan terms are up. It might be cheaper to pay the penalty versus paying it off early or vice versa. 

Don’t apply all at once

A surge of credit applications with varying credit types could cause a red flag on your credit report and drop your score with too many hard inquires too fast. If you need to borrow funds, but want to avoid giving your credit a hard hit consider a Credit Builder Loan from MoneyLion. 

For only $19.99/month, you could qualify for up to $1000 while improving your credit over 12 months without a hard credit pull. You’ll receive same-day funding and the rest is held in an interest-earning account until you pay the loan off in full. With the help of competitive interest rates and fixed payments, you could increase your credit score by up to 60 points within 60 days!

Monitor your credit and budget with RoarMoney

If buying a car isn’t in your budget and you don’t drive a ton of miles, leasing a car might be an option for you. Overall, the best way to build credit is to budget, pay your bills on time, pay off debt, and monitor your credit score. When you’re a RoarMoney member with MoneyLion, you get access to all of these financial tools and more

Join the MoneyLion family and get started today!