Bad credit sometimes seems like the end of the world, especially when it comes to car buying. But in life, it’s always important to look at the silver lining. Even if you’re not enthusiastic about getting a car loan with bad credit — due to higher-than-average interest rates — whether at a buy here, pay here dealership or somewhere else, just know that doing so will pay off eventually. How? Because, a lot of people don’t realize that getting a car loan is actually a great way to get your credit back on track. While it might be a little difficult shopping around to get a loan, once you do find one all you have to do is make your payments on time. Your payment progress will automatically be reported to the credit bureau, ultimately getting yourself out of that subprime category and into a better car down the road.
It might take a year or two, but it’s truly a great way to repair damaged credit. Let’s take a look at some numbers from a study Equifax did from 2010-2013 to back up this claim.
The Study
The people over at Equifax, which is a credit agency, looked at two groups of people in June of 2010, then again three years later in 2013. That first group of consumers had credit scores below 550 — subprime — and took out an auto loan in June of 2010. The second group though didn’t take out a loan at the start, but still had a score below 550.
Looking back, what they found is a clear-cut way of proving that those who took out auto-loans (even bad credit ones) saw a much larger increase in their credit score compared to the ones who didn’t take out any at the start of the study. Those who started their subprime auto-loans in June of 2010 increased their credit scores by a median of 52 points, which ended up being a 62.5% increase over the group who did not take out an auto loan.
They were also four-times more likely to have an improved credit score of over 640 by the end of the study, and more than 25% saw an increase of 100 points or more at the end of the three-year study.
Numbers don’t lie, especially from a trusted source like Equifax. While it might be rough going trying to pay off the high interest rate each month, a car is a necessity. So, why not kill two birds with one stone — getting transportation and improving your credit score — by getting a subprime auto loan?
How to Get Started
The best way to do this is talk to your credit union or join one if you haven’t already. Then, ask them about what they can do for bad credit auto loans. They’re much more flexible than a bank and a dealership that isn’t equipped to handle bad credit consumers, so this will be a good place to start. If they don’t give you a loan, head over to a buy here, pay here dealership. These dealerships still report your payment progress to the credit bureau, and it still boosts your credit score.
Or, find another used car dealership that advertises dealing with bad credit consumers. You have three options, so make sure to read up on each one further and make a decision.
Important: if you don’t make your payments on time, you’ll not only get the car repossessed, you’ll damage your credit further. Therefore, make sure you have a strong source of income, or save up for six months to a year first — if you’re able.
