Ways to Build Credit: How to Use Car Loans to Help Build Credit

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Did you know that the average credit score in Canada is 667? Your credit score holds many factors that affect your day-to-day life. Your credit score determines whether a business will approve a loan or a mortgage, how much you’ll pay for car insurance, and how much of a deposit you’ll have to leave on a rental.

With that said, many people are left trying to think of ways to build credit or repair it. Figuring out how to build credit can seem like an intimidating task, but it’s not difficult once you understand what drives a credit score. Here’s an option you may not have thought of; using a car loan.

If you are looking to build or rebuild your credit, using a car loan to do so can be a great option, and we’re going to explain just how you can do it. So, if you’re interested in getting a new car, a loan to get it, and a way to use that loan to also help your score, keep reading to learn how car loans can help you.

How Does a Car Loan Improve Your Credit Score?

The first thing you need to understand is how a car loan can help your credit score. Basically, any time you make a loan payment on time, it reflects positively on your score. This is because it shows that you’re a responsible borrower who can be trusted to repay loans.

The more on-time payments you have, the better your credit score will be. In addition, the amount of money you owe also impacts your credit score. This is called your credit utilization ratio.

It’s calculated by taking the amount of money you owe and dividing it by the total amount of credit you have available. Just for example, if you have a $1,000 loan and a $5,000 credit limit, your credit utilization ratio would be 20%. Keep in mind that a good CUR is around 30%, and anything below that.

The lower your credit utilization ratio is, the better it is for your credit score. So, by taking out a car loan and keeping your balance low, you can actually improve your credit score.

Ways to Build Credit: How to Use a Car Loan to Help

One of the fastest ways to build credit is to prove that you’re a responsible buyer. The credit bureau wants to ensure that you not only buy responsibly but that you can pay back your debts on time and by at least the minimum that you’re required to.

Once you get a car loan, you will notice that your score will start to improve the more you pay off, as well as from how consistent you are with on-time payments.

Let’s take a look at the main steps involved in this option to get you started finding the right auto loans to build your credit to where you want it to be.

Choose the Right Car Loan Lender

There are two main types of lenders when it comes to car loans; banks and dealerships. Each one has its pros and cons, so we’ll take a look at both. However, you should know that 70% of Canadians get their financing from a dealership.

That is quite the number compared to those that explore other options. One of the main reasons is the efficiency, especially when you use an online lending service like Cars Fast to match you with the right dealership. Even 63% of the U.S. population also obtained their financing through a dealership.

Once you understand what both options have to offer, it won’t be hard to see why the majority prefer working with a dealership over a bank.


One of the main reasons that people shy away from working with banks when it comes to obtaining car loans is the simple fact that if your credit score is too low, banks oftentimes won’t do much to work with you. That can leave consumers in a bit of a bind with no other options. Poor credit scores are one of the most common reasons for a car loan denial.

You would usually need a credit score of 660 or higher with a good credit record to help you qualify. Sometimes though, that won’t always be enough. There are a few pros to working with a bank, although the pros don’t outweigh the cons.


You can usually get a lower interest rate from a bank than you would from a dealership. However, this isn’t always true, so this pro isn’t reliable for all bank structures.

Another pro would be that if you have an existing relationship with the bank, it may be easier to get approved for a car loan.


The process of getting a car loan from a bank can take longer than getting one from a dealership. This is one of the things that consumers look for when seeking financing. They want to have an answer quickly, and that’s not always something that banks can provide.

Another con is that you may need to have good credit or a minimum credit score, as we mentioned earlier, to be approved for a car loan from a bank.


Dealerships or lenders that match you with appropriate dealers to help you get approved for what you need are the better options. This option is more popular considering about two-thirds of Canadians applied for financing with a dealership for their last vehicle purchase.

One of the older notions made by banks is that you can often get a lower interest rate. We know that’s not always the case. An online lender or a dealership with in-house financing can often offer you a lower interest rate in comparison to a bank.


The main pro is that the process of getting a car loan from a dealership is usually quicker than getting one from a bank. Additionally, you may be able to get approved for a car loan even if you have bad credit.

This is one of the top reasons consumers flock to working with a dealership over a bank. The convenience is another pro, as the process makes it less time-consuming.


Interest rates on car loans from dealerships can vary, but overall this won’t be too much of a con because you will often get a better offer. Another slight con could be that due to the lower rates and convenient process, you may be tempted to buy a more expensive car than you can afford if you get a loan approval for more than what you need.

Many people won’t consider this to be a con. It depends on the buyer and what you need and prefer.

One way to look at this is if you wanted one specific vehicle but didn’t think you’d get financing for it, so you set your sights on something cheaper. Once you receive a better loan offer than you were expecting, you could start looking at your preferred vehicle.

Get Pre-approved for a Loan

Before you start shopping for a car, it’s a good idea to get pre-approved for a loan. This would be the next step in the process of achieving an auto loan to help build credit. This way, you’ll know exactly how much money you have to work with, and you won’t be tempted to spend more than you can afford.

Getting pre-approved for a loan is also a good way to shop for the best interest rate since you can compare offers from different lenders. One of the best ways to do this is to use Cars Fast to get your financing options in minutes so that you can compare your offers and increase your chances of working with a dealership that will provide you with what you’re hoping for.

Make Your Payments on Time

This is one of the most important things you can do when it comes to using a car loan to build your credit. Every time you make a payment on time, it will help improve your credit score. The way it works is that with each on-time payment, your lender reports this to the credit bureau.

However, keep in mind that timeliness is the best way to make this work in your favor. If you miss a payment or make a late payment, it could damage your credit score. Of course, this is a general rule whenever you borrow money, but you don’t want to overlook the need to keep your payments on time.

One of the most efficient ways to ensure that you never have problems with this is to set up autopayments. If you don’t want to use autopayments, be sure to set up reminders so that you always make your payments.

Keep Your Balance Low

Even though a car loan can help improve your credit score, it’s still important to keep your balance low. This means making bigger payments each month so that you’re not borrowing as much money from the lender. This isn’t necessary, but it is a proactive measure.

As long as you are paying off at least the minimum, that’s great and will keep you in good standing with your lender. However, paying a bit more can help you pay off the loan more quickly, which will improve your score more quickly as well. Keeping your balance low will also help reduce the amount of interest you have to pay over the life of the loan as well.

Refinance Your Loan

If you have good credit, you may be able to refinance your car loan after a few years and get a lower interest rate. That, of course, will depend on how much you took out, the repayment term, and how much you think you can handle. If you’re using the right lender, such as Cars Fast, you may not have to worry about this step.

However, it is always an option if you think you may need it. One thing with refinancing is that it can help save you money on interest and help you pay off your loan even faster.

What to Look For in a Car Loan to Improve Your Credit

When you’re looking for a car loan to build up your credit, you want to ensure you’re finding a few things. Shopping for a car loan or refinancing opportunities is like shopping for a home. You want to make sure that you’re agreeing on payment terms that work for you and that you will be able to repay everything that you borrow.

Look for these things when deciding on an auto loan.

A Reasonable Loan Amount

You don’t want to over-extend yourself with a loan that’s too large. Try to find a loan amount that you can afford to pay back.

A Reasonable Interest Rate

A higher interest rate will mean higher monthly payments. You want to find a loan with an interest rate that’s low enough that you can make your payments on time each month. Remember that paying a little more each month is a good thing.

So, you’ll want to make sure the payments expected of you are low enough and within your means.

A Term Length That Works for You

The longer the term, the lower your monthly payments will be. But, a longer term also means you’ll be paying more in interest overall. Choose a term length that allows you to make your payments without difficulty while also keeping the amount of interest you pay to a minimum.

Get the Guidance You Need

There are a lot of methods out there for ways to build credit, but using a car loan is one of the best ways to do it. It’s also a method that not too many people think of until they’re done something else that may make their score worse.

Instead of navigating your credit rebuild blindfolded, use Cars Fast to get the car financing you need — all within minutes. You don’t even need to log in or sign-up to start. If you’re interested in simple, fast, and efficient lending for your next car, apply now.

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