If you’re considering car financing to build your credit, you’ll want to understand how it works and whether or not it’s a good idea. After all, car financing is a big financial commitment and you don’t want to make a decision that could hurt your credit score. Let’s take a closer look at this important question.
How Does Car Financing Work?
Car financing is when you borrow money from a lender in order to buy a car. The lender holds the title of the vehicle until you pay off the loan. Depending on the type of loan, you may be able to get lower interest rates if you have good credit or if you put some money down up front. Most car loans are secured loans, which means they are backed by the value of the car itself. That means if you fail to make your payments, the lender can repossess your car and sell it in order to recoup their losses.
Does Car Financing Build Credit?
The answer here is yes — but only if you make your payments on time every month. Your payment history accounts for 35% of your FICO score, so making regular payments on time can help improve your credit score over time.
This is especially true if the loan has a low balance compared with its limit (this makes up 30% of your FICO score). Additionally, having an installment loan such as a car loan on your report can also help boost your score since these types of loans are associated with responsible borrowing behavior and financial stability.
Car financing can be an effective way to build credit as long as you make sure to pay off the loan on time every month. It’s important to remember that if you miss payments or default on the loan, it could have serious negative consequences for both your wallet and your credit score.
So before taking out any kind of loan — including car financing — be sure that it’s something that fits into both your budget and long-term financial goals. With careful planning and responsible management, using car financing may just be the right choice for boosting up that credit score!