Applying for a loan to help you buy a car is useful, especially if you don’t have the savings built up to pay for your new vehicle outright. With various types of car finance to choose from, there is bound to be an option to suit you, even car finance with defaults. If you have struggled to be approved for loans in the past, it may be because your credit score is low. But did you know, car loans can help you improve this? We’ll take an in-depth look at the type of car loans you can choose from and how you can use them to increase your credit score below.
Types of car loans
When choosing your new car, there are a few ways that you can make your purchase without having to find a lump sum to pay for your vehicle in full. This is where car loans and finance options come in. Here are a few of the most popular car loans that you can choose from.
- Personal loan: This is a loan that you would apply for from a lender, like your bank, to give you access to the full amount needed to buy your car outright. You will own your new vehicle as soon as you drive it away, but you will make regular repayments to your lender to spread the cost of the car.
- PCP: Personal contract purchase is different from a loan. You will pay a deposit towards your car and borrow the rest. You will make monthly payments to your lender that covers both interest and depreciation. When your PCP contract ends, you can buy your car to own it, swap it for another and start a new contract, or give it back to the supplier.
- Hire purchase: You may need a deposit for this too – you will make monthly payments, but you won’t own the car until the last payment has been made. When you get to the end of your payment, you may have to pay a small fee known as the ‘option to purchase’.
Benefits of a car loan
Before you decide whether one of the above car loans and finance options is for you, it helps to know the benefits. Many of us don’t have a lump sum to go towards paying the full amount for a car, so having access to alternative ways that you can pay means that you don’t have to go without. Car loans allow you to pay for your car in a way that suits you, and you can even bring the monthly payments down with a larger deposit – some lenders may not even require a deposit! There are various car loans available that can be tailored to your circumstances, so it doesn’t matter whether you have a lump sum of savings, you can still benefit from a new car.
Can they help increase credit?
Believe it or not, car finance can actually help you to increase your credit. Your credit score and report follow you around throughout your life and shows lenders how creditworthy you are when it comes to managing your debts. If your credit score is low, you may find it harder to be approved for financial help, as lenders will see you as a risk. Thankfully, some lenders will approve your application even if you have a less than impressive credit score, and your car finance can help you to improve your position for the future. Here is how you can increase your credit with a car loan.
If you’re hoping that the finance option that you choose will help you to boost your credit score, you’ll first have to make sure that you are choosing an option that you can afford. Choosing to buy a car with the help of a loan means that you can make more affordable monthly payments. You should check how much a few options are going to cost you, to ensure that you are getting the best deal, and so that you can avoid further financial difficulty. More affordable repayments mean you’ll be able to increase your credit score as you will be able to keep up with your payments each month – showing future lenders that you are low risk.
Budget and income
Work out your budget for the month and how much you can comfortably afford to spend on your car repayments in line with your income. If money is tight, it may be worth saving for a deposit so that you can bring down your monthly payments further to make them more manageable. Make sensible decisions to suit your income. If you’re hoping to boost your credit score with a car loan, you should make sure that your choice suits your budget, so you can stay on top of your loan repayments with ease.
Can they harm your credit?
So, whilst you can build your credit with a car loan, it is just as easy to harm it too if you make the wrong decisions. If you choose a car that you’ll struggle to afford each month, or you have any outstanding debt that takes up a lot of your income, you may find it difficult to make repayments, and you may end up missing them. This will mean your credit score will deplete, and it will be recorded on your credit report. When you are comparing and searching for car loans, it is essential that you use a soft search – this means it won’t show lenders that you are looking for additional finance in various places.