Car Loans: A Winning Tool for Building Good Credit

Are you thinking about taking out an auto loan? An auto loan is often the first opportunity a consumer has to apply for a bank loan and build credit.

It's also a good way to rebuild credit after a bankruptcy or to strengthen a weak credit score.

Get off the credit disabled list

Auto loans are generally easier to qualify for—and pay off—than a student loan or mortgage, making them a good tool for proving your credit worthiness.

You'll need a little patience: If you're trying to re-establish credit after a bankruptcy, raise your credit score, or if this is your first loan, you'll probably have to pay a higher rate of interest than someone with a good credit score or an established borrower.

The good news? Once you've made regular payments for a year or two, you may be able to refinance your loan at a lower interest rate.

Get your credit rating in shape

• Don't miss a payment. This will lower your credit score and make it harder to get favorable terms on your next loan.
• Make sure your auto loan has no prepayment penalty so that you can make extra payments when you have the cash, or pay the loan off early.
• Make extra payments when you can afford them.
• Set up an automatic monthly withdrawal plan from your bank account so that you never forget or are late with a payment. 
• A used-car loan also counts toward establishing your credit history, and a used car is generally much less expensive. than a new car.

Make sure your lender reports your repayment history to the major credit bureaus. Any national or regional financial institution should do this automatically; if your loan is from a car dealership, make sure you ask if this information is reported.

Can't get a traditional auto loan?

If your credit rating is below average to get a traditional bank or credit union loan, bring in an ace closer. Find someone to co-sign the loan with you—a guarantor. A guarantor, or co-signer, is a person or company that will guarantee the loan will be paid, and is used when an applicant can't secure a loan based on his or her own credit history.

If you need a guarantor, think carefully about whom you will ask. The guarantor will need to have a good credit score and will be liable for loan payments should you be unable to pay off the loan. As long as you keep up with the loan's repayment terms, you'll be able to improve your credit score, but relying on your guarantor to make payments will negatively affect your score.

Keep in mind: There's no guarantee you'll be approved for the loan, even with a guarantor. The guarantor's credit history will be evaluated along with yours before a final lending decision is made. While you can't control the price of gas, you can help your credit score by fulfilling the terms of the best auto loan you can find. The better your credit score, the more choices you'll have in the future.

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