Auto Loans

So then, why do we recommend buying a car to either create or improve your credit rating? The answer might surprise you. In fact, most of our customers are surprised to hear our methodology. Here is the honest truth.

An automobile is considered an asset by all lending institutions and borrowing money using that asset as collateral is a safe investment by lenders. They know that if you stop making payments on the vehicle that they will be able recoup much of their investment. Whereas a credit card does not have anything secured against it to recoup in the event of a loss.

For you, the consumer, there are many benefits to a secured auto loan. You'll be able to obtain a lower interest rate unlike credit cards. Your payments will be fixed so you know your loan will be paid off within a certain period of time and you can even pay it off sooner if you like. Most auto loans report monthly to the credit bureau making sure they know about your improved credit status. There are even a few lenders that will review your loan arrangements after 12 months and will re-negotiate both your interest rate and payment.

In some circumstances you can even consolidate your debt into a secured car loan. For example your car might be worth $8000 and you only owe $2000 on the remaining balance. You can refinance your loan and include other debts into the consolidation all the while reducing your total monthly payments.

Around 10% of what makes up your credit score is based on your mix of credit. Credit bureaus look at credit card debt, auto loans and mortgages to round things out. The greater your mix, the better your credit score.

So why does all this matter? Why should you care about your credit score? You see not that long ago, only financial institutions would use your credit score as one indicator of your ability to repay a loan. Nowadays there are far more companies looking to your credit score to make decisions. For example, renting an apartment, purchasing a cell phone plan, applying for a job, etc. It now affects more than just your ability to borrow money. It's never been more important than ever to maintain a good credit score and financing a new or used car is one way to improve your score. 

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