Car loans are secured loans because they have property backing their repayment. The Federal Trade Commission (FTC) explains that banks and financial companies repossess cars if the buyers cease paying. People with bad credit can often get vehicle loans because of the collateral. Lenders charge higher interest on subprime accounts, which raises their profits. Eventually such borrowers build their credit up again by handling the car loans properly.
Time Frame
FICO, the biggest credit score provider, explains that every on-time loan payment helps your score and looks good on your credit reports. Banks and finance companies report loan details such as original balance, amount owed and payment dates immediately. A good car loan history, accompanied by good performance with other bills, builds positive credit within one to two years, although it does not completely offset prior damage.
Benefits
A good credit history means lenders, credit card issuers and others are more willing to open accounts for a person, which provides more financial flexibility. People who make their car payments on time and handle other bills in the same way can get credit cards, loans and even mortgages. Good records qualify them for lower interest rates, according to FICO.
Alternative
Sometimes people with extremely bad credit cannot qualify for a car loans to build it back up. They may ask a family member with excellent credit to co-sign for the vehicle. The loan is granted on the strength of the co-signer's records, and that person is equally responsible for repayment, according to Bankrate financial writer Pat Curry. The co-signer must either pay for the car or face ruined credit if the borrower defaults.
Considerations
People with bad credit who use a car loan to rebuild it are often forced to accept bad financing terms. Subprime lenders command high interest rates and tack fees onto the transaction. Warren Clarke, an Edmunds automotive site editor, advises refinancing the loan as soon as credit records are sufficiently improved. He states this is often possible within two years of good performance on the existing loan and other financial obligations.
Warning
Car loans can eventually harm credit if they last too long. Some loans run 60 months or even more. The Cars.com vehicle buying website warns that many people wind up owing more than their vehicles are worth when they sign up for long-term financing. They must pay off this difference or roll it into a new loan when they purchase a new vehicle, which means higher payments that could be difficult to handle. Late or missed payments on the new loan bring down the credit score.
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