Should I get a car loan to build my credit???

Great question! It honestly is.

I find the question “should I get a car loan?” is born out of legitimate questioning from a client wanting to make their credit score better and fast… Rather than, “how can I get a sweet new ride and say I did it for my credit?” There are obviously some cases where people pat themselves on the back and say “I did this to build my credit score” as they are driving around with a $50,000 truck. I may be naive but I don’t think that is the norm. I believe the majority of the emails, texts and calls that I get asking this question about credit are legitimately curious if it’s a good idea or not.

Short answer: There is a better way.

Long answer: Read below 🙂

I will start off by saying, building your credit score (even if it is already pretty good) is always a good idea. Always work at strengthening your credit score because it is a reflection of you. Your ability to borrow in the future, and your ability to pay back debt historically is all reflected through your credit bureau. I recently wrote a blog post on this exact topic with tons of tips and tricks on how to make your credit score amazing! You check it out HERE. 

The upside:

As for the car loan specifically it is surprisingly successful at building up a strong credit bureau score and history. It is an instalment loan with regular payments, a significant amount per month, it is automatic, and is often a reputable lending institution. It is secured to a hard asset (vehicle) and is convenient to get. Plus it comes with a huge plus: you get a sweet new ride that everyone can look at and say “wow, he/she must be doing well”.

The downside:

1. The downside is your ‘asset’ you just purchased dropped by 20% when you drove it off the lot. Go purchase a vehicle and then ask them trade it in for what you just paid and watch the sales floor laugh, and laugh, and then laugh some more. It is only minutes old, you should get the same value back right? You have all the paperwork from just a second ago. Nope. Never will it be worth what you paid for…I’m sorry! Vehicles brand new or used are a depreciating asset and will not hold their value. That is why aiming to purchase a vehicle cash is fiscally responsible because it separates the impulse purchase from the delayed/planned out purchase with savings. This helps rationalize your spending and will make you spend within your means every time.
2. The other downside is affordability. This is probably the most important reason of the two. Point number 1 will be argued until the end of time by financial planners/gurus VS dealerships and their salesmen. Both will be blue in the face with reasons why they believe they are right and the other is ‘out to lunch’. One indisputable fact remains: the monthly cost! By taking out a car loan, you are taking out a monthly obligation. This payment must be paid month after month for the 3-8 years you take your car loan for. This may be building up your score, but it may have just cost you the home you wanted because you can no longer afford the mortgage payment. When qualifying for a mortgage there is “Total Debt Servicing (TDS)” which takes in consideration all of your monthly debts and your new housing costs VS your income. A car loan payment of $200/biweekly doesn’t seem like a lot, but it will significantly reduce your ability to own that dream home you had your eye on lately. No car is worth that!

Solution?

If you need to build your credit, first read my previous blog post mentioned above. Then if you decide you still need a loan to best do this, I would suggest using a company like Refresh Financial. They will give you a small loan with a WAY smaller monthly payment and will give you a WAY smaller debt amount. Instead of you borrowing $30,000  for the next 8 years, you are borrowing $2000 over 1 year or 2 years. This will rebuild your credit score with an instalment loan, with automatic payments, regular payment, and for a big enough amount ($2000) that it impacts the credit score positively. Best of all this debt will not haunt you with a huge payment and a huge balance owing. Wait…there is another best of all. The loan converts into a High Interest Savings Account once you are finished paying it back. Now you have a rebuilt credit score and a savings account.

Take a hike car loan! Haha… I should mention that this advice only pertains to those looking at buying a home or getting a mortgage of some kind. If that is not your goal or aspirations, borrow all the car loans you want. I never recommend a car loan for any person, any day of the week, but the concern here is with those looking at getting a mortgage soon. For everyone else, this advice may not be as critical.

If you have a family, friend, or yourself asking similar questions feel free to comment below or email me. I would be more than happy to discuss ideas options and make sure that you are getting set up successfully to build your credit score while building your chances of getting an amazing mortgage. It is possible to do both! 🙂

Thanks for reading!

Graham Reimer

www.mortgagecrusher.ca