There are car financing options available for all different levels of credit. But did you know it is also possible to build good credit while financing a car? There are a number of simple methods you can use to ensure that your credit rate improves, while driving the car you want.
Your credit score is perhaps the most important thing in your financial life. It affects your loans, your credit cards, and even your ability to get a mortgage and secure housing. With that in mind, the choice to finance a car can be a daunting one. This is where using the financing process to maximise your credit comes in.
This guide takes you through all the best ways to ensure you keep building good credit, while financing your car.
Stay Up To Date With Your Credit Score
Knowing your credit score is the single most important step towards improving it. By keeping on top of that number, you can start to understand the factors that effect it.
Before you choose to finance a car, you should get a free credit report from a service like Experian or Credit Karma. This can help you break down your credit history and make good financing choices. It can also indicate the interest rates you may expect during financing.
If your score is low, you may wish to start improving it before applying for car financing. Paying off existing debts and disputing errors can be helpful for reducing your interest rate and increasing your score for the future.
As the car financing process continues, it is a good idea to routinely check your score and investigate the factors that are changing it.
Choosing The Right Loan For You
When financing a car, choosing the right financing plan can make the process of building credit a lot easier. It can be worth shopping around at multiple lenders to find the best interest rates. This allows you to save money, making it easier to stay on top of payments.
If possible, avoid subprime loans. These are loans designed for borrowers with poor credit, usually including higher interest rates and extra fees for early repayment. If subprime loans feel like your only option, it may be worth waiting and improving your credit score before finding the right loan.
Always choose a loan that has an appropriate monthly repayment for you. Ensuring you can pay off your loan in time is a huge factor in improving your credit during your financing period.
Make Your Payments On Time
As above, making the correct monthly payments is a vital part of repaying your car loan and improving your credit score. Payment history makes up 35% of your credit score, so ensuring payments are timely is an essential step for improving it.
In general, it is always advisable to pay debts in a timely manner. Even one late payment can have a negative impact on your score, so staying ahead with appropriate budgeting is the best course of action.
If you have several kinds of loan, try paying a manageable portion of each per month, rather than focussing on paying off one altogether. This is because utilising a variety of credit can actually be good for your credit score. It is known as your credit mix, and makes up 10% of your credit report.
Keep Your Loan Term Reasonable
The longer your loan term, the lower your monthly payment becomes. While this can seem like a helpful system, choosing the longest possible loan in order to lower your monthly payment is not advisable.
To improve your credit score, choose a manageable repayment amount that doesn’t needlessly drag your loan on. This should be a sum of money you can budget for each month. By reducing your loan term, you will also pay less interest.
While it isn’t necessary, choosing to pay off your loan early is always a preferable choice. Even paying a small amount extra each month can significantly decrease the length of your loan. This can help you build credit more efficiently, but always make sure your lender doesn’t have a prepayment penalty.
Manage Your Other Debts
Alongside your car loan, you may also have credit cards, a mortgage, or other personal loans. While it is possible to borrow money from multiple sources and successfully repay it, this may not be great for your credit score.
Your credit utilisation ratio indicates how much of your available credit you are currently using. It is recommended that you keep this score below 30%. This means only using 30% of the credit you have been offered in total. Despite the temptation to use your credit to make important purchases, sometimes it is best to hold back. By showing restraint and avoiding creating debt, you can improve your credit score and illustrate your responsibility as a borrower.
If possible, consider paying down other debts before they become unmanageable. The snowball and avalanche methods are both popular ways of managing loan repayment.
Are you ready to explore competitive car financing options to suit your credit score? Get a free quote from us today.
Financial Disclaimer
Rates from 10.9% APR. Representative APR 19.9%.
Representative Example: Borrow £6,000 with £1,000 deposit over 48 months with a representative APR of 19.9%, the monthly payment would be £153.29, with a total cost of credit of £2,357.76 and a total amount payable of £7,357.76. Bad Credit Motor Finance is a broker not a lender.
At Bad Credit Motor Finance, we’re here to help you find the best vehicle financing solutions that make fuel-efficient driving accessible, even on a tight budget.
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