Does Buying a Car with Cash Build Credit?

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Even with poor credit.

By

Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


, Contributing Writer - February 9, 2017

Buying a car with cash is a tempting proposition if a buyer has the money. They get to enjoy life without a car payment, avoid paying interest on an auto loan, and don't have to worry about trying to get approved at the best rate.

Buying a car with cash is especially enticing around tax season, when consumers have refunds rolling in. For many, this is the largest windfall of cash they'll receive all year.

However, buying a car with cash does not build credit, so there is still a compelling argument for taking an auto loan if a consumer is trying to improve their credit score.

How an Auto Loan Can Build Credit

The saying goes: it takes credit to build credit. It's impossible for a consumer to maintain a positive credit history unless they are actively using credit responsibly. An auto loan is a form of installment credit, and using one to build credit is quite simple.

All a consumer needs to do is make all of their payments on time and make sure that the lender reports the loan and payments to at least one of the three national credit bureaus.

A person's payment history on credit accounts is the most important factor in computing their credit score. Therefore, each and every car loan payment made in full and on time can help build a borrower's credit. Over the course of the loan term, consumers can expect to see their credit score improve — that is, as long as they are keeping up with their other obligations.

For consumers who need a vehicle and are also looking to raise their credit score, both can be done by taking out a bad credit auto loan.

Auto Loan Advantages

While a borrower will also be paying interest, an auto loan still allows them to buy the vehicle they need while getting a chance to improve their credit. But that's not the only advantage.

  • Get Something Nicer and Newer - If somebody plans on buying a vehicle with cash, their options could be limited. But if they took some of that cash and used it as a down payment instead, they typically could finance a newer and nicer vehicle while still keeping their monthly payment manageable.
  • Added Legal Protection - Private car purchases are usually made "as is" with no protections for the buyer. On the other hand, there are a number of laws in place that protect consumers who finance a car purchase at a dealership.
  • Keep Money in Savings - Instead of exhausting their entire bank account, a consumer can take out an auto loan and, after making a down payment, keep the rest in their savings account. This way, they'll have an emergency fund ready to cover any curveball life throws at them.

Getting Financed

Many consumers with poor credit believe they won't be able to qualify for a car loan. While they might not have any luck applying with a traditional lender, they may have a good chance with a lender who works with bad credit borrowers.

At CarsDirect, we are partnered with a nationwide network of car dealerships that are signed up with the right kinds of lenders. You may be able to get the car you need, and a chance to build your credit, if you complete our free and easy online auto loan request.

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, Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


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