Making auto loan payments will allow you to keep that great car or truck you just bought, but for those who need more of an incentive to be on time with auto loan payment checks, a good track record on your auto loan will also be likely to help you increase your credit rating.
Three national credit agencies, Experian, Equifax and Transunion, report your credit history to lenders and other parties. The Fair Isaac company or FICO handles your credit score or “fico rating.” Making auto loan payments can be a great way to raise your FICO score and get better interest rates on future loans. Here are some tips for making the most of this strategy.
It may seem like a no-brainer, but in some cases, your lender may have restrictions on how they report your auto loan. This may be especially true if you are landing from a small dealer or other informal lender who may handle financing themselves. Make sure that your auto loan will go to the books to help you build credit.
Some of the auto loans that will get reported will not raise your credit score right away. Vendors today are offering some riskier types of auto loans, such as no money down financing and long-term loans, that may actually lower your credit score at the beginning. As you successfully pay them off, your credit should rebound, but it’s a good idea to research the exact timeline to know just how the loan will affect your credit at any given time.
Making on-time payments on your auto loan should build up to a “critical mass point” where your existing loan history allows you to be eligible for refinancing or loan consolidation solutions. Refinancing your auto loan will allow you to lower the interest rate if another lender offers to buy your debt. That lender will see your existing on-time payments as proof of ability to pay that will lower your general credit risk.
Another way to make loan payment strategies work for you is to look at that special combination of benefit arising from choosing the best buying strategy. What this means is that, although getting an auto loan may raise your credit score, it’s not a reason to invest in significant financing if you are able to make a large down payment. Debt is ultimately good for the lender, because the borrower will be paying so much in interest over time. If you don’t need auto financing, think about all of the potential benefits of avoiding an auto loan and paying cash, or making a large down payment and financing a smaller amount of your vehicle’s worth.
All of the above can help or buyers realize the maximum benefit from the debt that they have taken on. An auto loan is a responsibility, something that has to be worked into a personal or household budget. It includes significant sacrifices and the potential gains, as well as some startling risks. Be sure to research your auto loan thoroughly for the best chance at getting more of the good and less of the bad.