Rebuilding your credit can be a difficult and long process. If you’re a Canadian with bad credit, it may seem like a nearly impossible task – and without good credit, you may not qualify for auto loans and home loans from most lenders.
At Ride Time, we have years of experience helping Canadians with bad credit get reasonable auto loans. If you take out a smart auto loan, not only do you get the transportation you need – you can also build your own credit score.
However, it’s not always a good idea to build credit with an auto loan. In this article, we’ll discuss both the pros and cons of doing so – so you can decide whether or not to invest in a high-quality used vehicle from Ride Time.
Building Credit With An Auto Loan – The Pros
If you’re thinking about using an auto loan to help you rebuild your credit score, here are some of the benefits of doing so.
- Installment loans can help build your credit score – Your credit mix is one of the primary methods by which your credit score is determined. Ideally, you want a mix of revolving debt (Credit cards) and installment loans (student loans, mortgages, personal loans, auto loans).
If you only have a credit card, you may not be building your credit score as quickly as you could if you also had an installment loan. However, your score will always continue to increase as long as you pay off all of your debts on time, regardless of the different mix of credit you have.
- You can refinance once you get a better credit score – If you have a bad credit score, you may have to get a car loan at a 10% or higher APR, which is not ideal. However, even repaying your loan on time for 6 months can boost your credit score significantly.
Once you have better credit, you can refinance your loan at a different lender. When you get a lower APR, your monthly payment will decrease. You will also pay less total interest on the car, saving you money in the long run, and making your finances more manageable.
- Auto loans have a bigger effect on mortgage eligibility – Auto loans, like mortgages, are installment loans. That means that, when you eventually apply for a mortgage to buy a home, lenders will want to see that you are able to repay installment loans in a timely fashion. While credit cards can boost your score quite a bit, they do not have as much of an effect on your credit score when it comes to purchasing a home.
Building Credit With An Auto Loan – The Cons
Here are a few drawbacks to taking out an auto loan in order to build your credit.
- Your new car could get repossessed – If you take out an auto loan that’s too much to pay back, and you fail to make payments, your new car could get repossessed – which will devastate your credit score. Make sure that you’re ready to take on the responsibility of an auto loan – especially if you are considering trading in a car that’s already “bought and paid for”. Otherwise, you could end up in a worse position in the long run.
- Bad credit could mean unreasonable interest rates – If you have very bad credit – under a 600 FICO score – it’s probably not a good idea to get an auto loan. You could pay a 15-25% APR – which means you’ll be paying thousands of dollars in interest over a 5-year auto loan.
It’s a good idea to try to rebuild your credit somewhat before applying for an auto loan in order to avoid this.
- Ties up money you could use to pay other debts – If you have outstanding credit card debt, and are only paying minimum payments on it, you should not be considering an auto loan. Your APR on your credit cards will usually vary from 15-24% – so paying them off first is the best way to rebuild your credit score and save money.
If you really need a reliable car to get to work, this advice may not apply – but it’s still a good idea to pay down as much other high-interest debt as you can before you get an auto loan.
Bad Credit In Canada? Need A Car? Come To Ride Time Now!
Whether you’re trying to rebuild your credit score, or you simply need reliable transportation in order to get to work, Ride Time can help if you have bad credit in Canada.
We believe in second chances. That’s’ why we work with 15+ specialized lenders to get you the best deal on a high-quality used car in Canada. If you can give us proof of $1,500 net income, 3+ months of employment, and a valid Canadian licence, we can work with you to find a car that’s perfect for your needs.
Whether you’re in Winnipeg or anywhere else in Canada, visit our website today and see what we have to offer! We can deliver our cars anywhere in Canada, so you can shop online and get a great deal on a high-quality vehicle.