Can A Buy Here, Pay Here Car Loan Help Improve Bad Credit?

Automotive Articles

One of the top ways to fix bad credit is to obtain loans and credit cards and establish a good payment history. However, many people with bad credit are stuck in a catch 22. They need credit to fix poor scores but their poor scores prevent them from getting it. However, if you're in the market for a vehicle, there are some dealerships that offer special financing for people with bad credit. The question is, however, will getting this type of loan help improve your credit score?

How Car Loans Impact Credit Scores

Installment and revolving credit are the main types of credit offered by banks and financing companies. Revolving credit is a reusable loan where each payment you make frees up credit you can use again (e.g. credit cards). Installment credit is a traditional loan where each payment you make simply reduces the amount you owe (e.g. vehicle loans). There is also open credit which is credit that requires you to pay the balance in full every month (e.g. cell phone bill). However, this type of credit isn't typically reported to the credit bureaus unless or until you become delinquent.

When creditors evaluate whether or not to extend credit to you, they will usually factor in the types of credit you have and how well you utilize them. So getting an auto loan can help improve your credit score especially if all you have on your report are credit cards or open credit. This allows creditors to see how well you handle credit over long periods of time. It won't erase the bad credit that's already on your report. However, the longer you make your auto loan payments on time, the more irrelevant your previous poor payment history will become.

How Buy Here, Pay Here Financing May Help

Buy Here, Pay Here describes a type of financing designed to help people with poor credit get cars. It is not offered by banks, but rather the dealership itself. Therefore, you would make your payments directly to the dealership where you buy your car or truck.

While car dealers who offer this type of financing also evaluate your credit when considering whether to finance you, the bar for approval is generally set much lower than a bank's. For instance, the dealership may extend credit to you even if your score falls between 300 and 620, the range that's generally considered poor. The dealership may require that you have been employed for a certain period of time or put down a bigger down payment, but securing the loan is typically easier. This means you can get a much-needed vehicle while improving your overall score with your on-time payments.

However, there are a few things you must watch out for before you sign a financing contract or a Buy Here, Pay Here loan may hurt your credit more than it helps.

First, it's critical that you secure a loan with a dealership who will report your payments to the credit bureau. Not all dealerships that offer this type of financing do. Preferably, you'll want to get a loan with a company that will report your payments to all three consumer agencies since you don't know which one future creditors will use to check your credit.

Another major issue is the loan itself. Buy Here, Pay Here loans typically come with high interest rates attached, so you can expect your monthly payments to be larger than those for a traditional bank loan. Therefore, you need to make sure those payments fit comfortably in your budget; otherwise, you risk defaulting on the loan and ruining your credit even further.

Additionally, the amount of the loan should not push your debt-to-income ratio (the amount of debt vs. your overall income) beyond an acceptable level. Some creditors such as those offering home loans do look at your debt-to-income ratio to make sure you can afford the loan you're applying for. You generally want your debts to only comprise 36 percent or less of your total income.

Lastly, to protect their interest in the asset, some dealerships who offer Buy Here, Pay Here financing will put security devices on the vehicles that let them remotely disable the car or truck if you miss a payment. The device will usually be removed once you pay off the loan. If the dealership does put security devices on its vehicles, make sure you're clear about the circumstances under which it will be activated, so you don't experience any unpleasant surprises.

For more information about financing options, connect with a used car dealer like U Pick U Save in your area.

29 May 2015