Does Financing a Used Car Build Credit?

If you have bad credit, or very little credit history, taking out a car loan can be beneficial and help you improve your credit score. However, you have to handle the loan responsibly and ensure your timely payments are being reported to the credit bureaus.

Used or New

In terms of building your credit history, financing a used car is no different than financing a new one. In fact, if the amount is lower and the loan is more affordable, financing a used car is probably a better move. You need to ensure you can comfortably afford the monthly payment, and you need to pay it on time every month. Try setting up a monthly withdrawal from your bank account or other method of paying automatically so that you never forget.

Reporting

The crucial factor in building your credit from an auto loan is to make sure the lender is reporting your history with the account to the credit bureaus. If you have a loan from a large, nationally or regionally recognized financial institution, this is a given. If you are getting financing from the used-car dealer himself, you need to check.

Dealer Financing

Some used car dealers offer a buy-here-pay-here arrangement. This is financed by the dealer and is usually for people who have bad credit. It can involve really high interest rates. Most of these loans are advertised as being a good way to build your credit, but some unscrupulous dealers do not have a connection with the credit bureaus. Your conscientious payments will be doing your credit score no good at all.

Co-signer

If you don't trust dealer financing and would rather go with a more established financial institution, look for a co-signer. If you have a relative or friend with much better credit and the person is willing to co-sign for you, you will be able to get a loan at lower rates from a reputable auto loan company or bank. This institution will report your payments and as long as you keep current, your credit score will improve.