When a person has a low credit score rating, it can be very tough to get a credit card or a loan through regular means. Obtaining a car loan is typically much easier. This is because car dealerships have many lenders that they work with, and enough that they can find an interest rate that will please the customer, even though it may be a little higher. Car loan lenders also know that their loans are secured by vehicles as well.

If you consider how credit scores are calculated, car loans are a great way to re-establish your credit score. History of payments make up 35% of your credit score, and diversity another 10% – meaning that having a car loan helps your credit grow in two different categories!

Another way a car loan can help you rebuild your credit is that your spending will not get out of control. This is an “indirect” way, but it helps nonetheless. The fact of the matter is that you need credit in order to build your credit rating. Car loans are not a form of “revolving” credit and therefore can help you build your credit without making purchases that are detrimental to your financial health. With an auto loan your payments are set at a certain amount each month, and you are not given access to any extra credit.

When you get an auto loan it is crucial that you make your payments on time every single month. Do not be tempted to use the grace period. A grace period gives you more time to make your payment. For example, your payment date may be the 15th, with a grace period of the 20th. This means you can actually pay the payment on the 20th without receiving a late charge. You should instead make sure you make the payment on the 15th and do not use this grace period, as in the long run it can affect your credit score.