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Does an Auto Loan Help You Rebuild or Improve Your Credit?

Does an Auto Loan Help You Rebuild or Improve Your Credit?

If you're looking for an auto loan when you have bad credit, the impact that your application will have on your future credit score might not be the first thing on your mind. You're probably more concerned about getting your application approved by someone who won't reject your application after one look at your credit file.


However, by applying for a car loan with a lender who accepts bad credit applications, you can actually kill two birds with one stone. You can get the finance you need for vehicle, while at the same time doing something about your poor credit history.


Taking out an auto loan and keeping up with the repayments will help improve your credit score in the long term. If done correctly, it can even help to rebuild a bad credit history that you've built up through previous financial difficulties. However, it's not a completely straightforward picture.



First, a Slight Negative


There's one important point to be aware of, as it can cause a slight, temporary hit to your credit score. Applying for a loan will in most cases place a so-called hard inquiry onto your credit file. This entry is basically a note that shows you've applied for a loan, and the lender has checked your creditworthiness during their approval process.


This in itself isn't particularly harmful - it'll only drop your score by a point or two. Even if you apply for several different loans, all hard inquiries made within a 30 day period will count as just one.


However, if you spread your loan applications out over several months, the small amount of damage each inquiry makes can start to mount up into something more significant.


Positive Credit Score Effects


However, that negative effect is very minor and short term, especially when you compare it to the credit-building benefits of taking out a car loan. Applying for an auto loan can improve your credit in two main ways.


1) Balance Your Profile


An auto loan is classed as an installment loan, meaning one which has fixed repayments over a fixed term. This kind of finance is better for your credit score than open-ended debt like credit cards. Having a newly approved installment loan on your profile will help to balance it out, and therefore increase your score.


2) The Power of Repayments


The second advantage is much more powerful. When you're approved for a loan, this adds a small positive entry into your file, as it shows that a lender has been satisfied you're trustworthy.


What's more, every time you make a repayment, another positive entry is added to your file. Over the length of your loan term, these little pieces of positive history can compensate for any bad entries you've attracted in the past, and can even cancel out their effects completely given enough time.


To sum up, applying for an auto loan in Edmonton can work for you on two levels. As well as helping you get behind the wheel, it can also give your credit rating a boost, leading you toward a brighter financial future.

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