Roughly 31% of Canadians indicate they have too much debt, with 36% struggling to manage their day-to-day finances. These struggles make it seem impossible to purchase a new car.
So, how can you buy a new vehicle if you’re struggling with finances? One possible solution could be an auto loan.
Auto loans aren’t just a way to purchase a new car. In fact, they can also help you repair your credit.
Car loans can help you rebuild your credit by adding weight to certain factors in your credit reports. These factors often comprise the basis of your credit score.
How does this work? Keep reading to find out! We’ll explore how to repair your credit with an auto loan.
What Is a Good Credit Score in Canada?
The first thing to understand about credit is what comprises a good score. Canadian credit scores range from 300-900. Generally, anything above 660 is considered a good score.
More specifically, credit scores often break down in these groupings:
- Good = 660-724
- Very good = 725-759
- Excellent = 760-900
Your credit score is a number that demonstrates you pay back your loans. The higher your score, the more likely lenders are to loan you money.
In Canada, there are two primary credit bureaus. These two are Equifax and TransUnion.
These credit reporting bureaus calculate each Canadian’s credit score. These companies collect data about financial activity and distill this information based on five critical factors.
These five factors include:
- Payment history
- Credit Utilization
- Credit history
- Public Records or credit mix
- Credit inquiries
So, how can an auto loan repair your credit? We’ll discuss how to fix your credit with an auto loan below.
How an Auto Loan Helps Rebuild Credit
As we’ve mentioned, one of the factors in your credit score is your payment history. This factor accounts for roughly 35% of your credit score.
It benefits your credit score when you make payments on bills, loans, and credit cards that become reported to the credit bureaus. Similarly, missing and late payments make a critical impact on your score.
So, how do auto loans fit into this? Auto loans come as installment loans.
Installment loans are a type of credit where the borrower agrees to repay the borrowed sum over a determined period. Missing one payment could cause you to default on your loan.
However, the flip side is that installment loans often carry much higher credit amounts than other credit lines. One example of this is a credit card.
Because of this higher credit amount, these loans have an increased impact on your credit. So, paying these loans on time can quickly improve your credit score.
Also, taking out a car loan adds to your credit mix and new credit. These factors comprise roughly 10% of your credit score.
Benefits of Auto Loan Payments
You may wonder why an auto loan is better-suited for repairing your credit. There are several reasons why these loans can help.
First, as mentioned before, these loans carry higher credit amounts than other lines of credit. As such, they have a weightier impact on your credit score.
Second, auto loans generally use simple interest costs instead of compound interest. This advantage makes auto loans an excellent financial decision.
Many loans become cumbersome for people because of compound interest. The interest accumulates so fast that people can hardly make a dent in the principal amount.
Auto loans function differently. The borrower agrees to pay back the money with a flat percentage of the borrowed amount. This way, the total amount paid cannot snowball out of control.
Finally, lenders amortize your car loan repayment schedule. Amortization means you’ll receive the sum of the loan upfront. Then, you’ll pay this loan back incrementally.
These amortization schedules use inputs like your down payment amount, loan term, and interest to determine the size and frequency of your payments. As such, you’ll rarely receive a schedule that becomes too much for you.
Ways to Pay Off Your Auto Loan Early
Paying off your auto loan early can also improve your credit score. After all, lenders appreciate it when you return their money before the deadline.
The question is, what tips can you use to pay off your loan early? First, you could pay half your monthly amount biweekly. This strategy can help you make 13 annual payments instead of 12.
Some lenders may not let you do this. However, if you can pursue this strategy, you can repay your loan faster.
Another option is to round up your recommended payment to the nearest $50. This additional money can help you pay your loan faster.
Another strategy is to make one sizeable extra payment each year. For example, you could use your work bonus to make an additional dent in your total amount owed.
If you can’t make one large payment each year, consider making at least one over the loan’s term. This additional payment can go a long way to reducing what you owe.
Finally, you can always consider refinancing your truck loan to get a smaller monthly payment. You’ll also receive a new pay-off date. You can use this approach as a last resort if your installments are currently too large to manage.
Repair Your Credit With an Auto Loan
As you can see, an auto loan can go a long way toward improving your credit. These financial resources can even repair your credit and significantly raise your score.
All that’s left is to find the best lenders for an auto loan. To that end, consider taking out a loan with us!
We offer several incentives for our borrowers. First, you could qualify for a loan with lower interest rates! A lower rate leads to lower monthly payments.
We also let borrowers compare our rates with multiple lenders across Canada. This practice can also help you save money on payments.
Finally, our goal is to save our borrowers money. We want to help people improve their credit and achieve financial goals instead of lining our pockets. Apply now to receive an affordable auto loan today!