Why a Bad Credit Car Loan is Better Than Paying Cash When Rebuilding Your Credit

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Automotive Editor

John Diether has been a professional writer, editor, and producer since 1997. His work can be found on TV, radio, web, and various publications throughout the world.  He is a graduate of Northwestern University and has a 1992 Cadillac Brougham d’Elegance in his garage. 


, Automotive Editor - May 5, 2016

CarsDirect Fact: The best way to rebuild your credit score is by using credit responsibly—getting an auto loan with higher interest rates is more expensive than paying cash, but timely loan payments are a much quicker path to a good credit score.

Paying cash for a car is a good thing, right? You save money by avoiding interest and don't have to worry about budgeting for monthly payments. For some buyers, it's really that simple. But if you're trying to rebuild your credit, a car loan does more than get you a new set of wheels. It can be a powerful tool to boost your credit score and save you a lot of money down the road.

Aside from a mortgage, a car loan is the fastest way to rebuild your credit. It's an installment loan, meaning you pay back a lump sum in equal monthly installments over time. This type of credit carries a lot more weight with the credit bureaus than credit cards. It shows you can handle substantial monthly payments over the long haul.

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Assuming you make all payments on time, your score can start to improve in as little as three months. After a year, you should see a substantial improvement in your creditworthiness. It doesn't matter whether the car is new or used, or what the interest rate is. What creditors care about is that you're paying it back as scheduled.

Since you're still in the process of establishing good credit, don't expect to get the lowest rates around. However, you can minimize what you pay in interest by making extra payments, which also means you'll pay off the loan faster. Another option is refinancing your balance with a lower-rate loan once your credit improves. Most banks will make refinancing loans to borrowers with "good" credit scores, regardless of where you financed originally. As always, it pays to shop around for the best rate.

Before applying this strategy for rebuilding your credit, you must be confident that can repay the loan as promised. Getting a loan that you can't afford will only delay your effort. Falling behind on payments can harm your score just as quickly as making them on time helps it. Aim for a payment that fits comfortably into your budget, even during months where your other expenses are higher than usual. Also remember that you don't have to stay in the loan until the last penny is paid. Your options for refinancing on better terms will increase right along with your credit score.

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, Automotive Editor

John Diether has been a professional writer, editor, and producer since 1997. His work can be found on TV, radio, web, and various publications throughout the world.  He is a graduate of Northwestern University and has a 1992 Cadillac Brougham d’Elegance in his garage. 


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