Personal Finance

Building Credit - Take 18-month Used Auto Loan?

  • Last Updated:
  • Sep 17th, 2018 8:17 pm
[OP]
Newbie
Sep 13, 2018
3 posts

Building Credit - Take 18-month Used Auto Loan?

Hey guys,

I am in my mid-20's and making a run at building credit. Never focused on it in the past as I'm self-employed. However, I'm attempting to qualify for a mortgage in the next two years. I'll have a sizable downpayment (30% or so on a $175k property) but still need an acceptable credit score to get in with the lender I've selected.

I just started this process. The only unsecured card I managed to get approved for is Capital One Gold. $300 SL, probably ups to $500 within six months and again six months after that. I plan to request an upgrade and manual review (hopefully they will) after 6-8 months, but by then I should qualify for a more reasonable limit elsewhere also. My credit score is in the 550's and the one collections item will be aged off before going for the mortgage.

Now, I have the opportunity to buy out my mother's vehicle. There would be about 18 months of payments remaining for me to cover. I just got my license and it seems like an obvious decision. I'm not a daily driver as I work from home and live in walking distance of my son's school. I would have opted for a vehicle that's $2.5-3.5k but this one will be around $5.5k after all payments are done. The resale value is around $6-6.5k and the mileage is ultra low. Ultimately, I don't mind financing it over an outright purchase out-of-pocket and I do find it to be a potentially smarter play for my situation.

>>> My Question <<<

If I get financed for this vehicle, pay on time for those 18 months and cover it in full -- will this have a significant positive impact on my credit?

If I iget financed for the vehicle, pay on time but pay the whole balance off in 8-10 months -- will this be even better or at least just as effective?

The payment is around $300 a month, my income is in the $50-60k range (gross, self-employed) and my only other open tradeline is the new Cap 1 unsecured card with a $300 limit.

My goal is to get my credit score up as quickly as I can. The credit card process I envision will be at least six months before I can get a second card with a good limit (in respect to my income) but this auto loan is a quick way to show I'm capable of making sizable payments month-in and month-out. In my head it makes sense, from a credit building perspective, but what's your actual experience here?

Thanks in advance!
5 replies
Moderator
User avatar
May 8, 2009
6508 posts
2754 upvotes
45.420833°N, 75.69°W
  1. the car loan will definitely boost your credit history once it's paid off
  2. only 18 months? I wouldn't rush to pay it unless you need the mortgage sooner. Probably have car loan paid off three months before applying for the mortgage

Just my 2¢
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Deal Fanatic
User avatar
Mar 23, 2008
6944 posts
3943 upvotes
Edmonton
I think the big hitch in your plan is that the auto finance company is likely to be very hesitant to take you on as a client, with a 550 credit score. Unless your mom is willing/able to co-sign for you.

C
Deal Addict
Jan 15, 2017
1607 posts
1107 upvotes
You'd probably be better getting another credit card and getting your credit limits increased.

First, you don't seem to actually need a car. Why take on the expenses of a car just to try and rebuild credit?

Second, credit rebuilding takes time. It doesn't happen over night. Higher credit scores simply take time as credit scoring is based on history and history takes time.

Finally - here is what you can expect when you apply for the car loan. The application process will result in a new inquiry and that will lower your score slightly. If you are approved, a brand new loan will be too new to score with no history and this will potentially lower your score. Now let's look at the loan itself. As it is an installment loan, the $5.5K limit and high balance at the beginning of the loan will also potentially lower your score as you have effectively used all the available limit. Of course, as you make your payments over time this will reverse. But as the loan will be for a short period of time and then stop, it will then stop benefiting your score. It won't hurt your score once paid off, it will just simply be there.
Deal Addict
User avatar
Mar 9, 2012
1598 posts
621 upvotes
Kitchener
Just my 5¢ worth (since 2¢ are rounded down in this country now): If you have a 30% down payment, you're not getting a conventional mortgage, and with the amount of equity, I can't see why you'd have issues a mortgage with a very competitive rate.

As for building your credit, you could get yourself 1 or 2 SECURED credit cards. They build your credit the same way as a non-secured card. Just get them now rather than wait, then you'd have 18 months of reporting going in.

See about getting an instalment loan for the car, at 24-months. Pay it off early though, just a couple months before you get your home.
Jr. Member
Mar 9, 2015
155 posts
47 upvotes
Aldergrove, BC
Where do you have the down payment now or is it going to be from the Bank of Mom? If you had $50k in savings or RRSP/TFSA with any major bank I am sure they will give you a credit card.

I don't think you need a car loan just apply for another card like Canadian Tire and then run everything threw your cards paying then pay them off.

I started rebuilding my Canadian credit (lived in the USA and didn't use CND credit) in 2015 and it grows fast. I started at $300 with CND tire and think I am at $18000 now

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