Repairing bad credit with a car loan

Here’s how you can use a new car loan to re-establish your good credit rating.

There are dozens of unfortunate circumstances that could lead to an individual having a poor credit rating. Regardless of what led you there, it will still have a negative impact on any type of credit product you may want or need. A bad credit rating will not only make it difficult to obtain a credit card, you will also have a hard time in obtaining any home or personal loans when you need them.

Related: Comparison of new car loans | Comparison of bad credit car loans

How to repair your credit rating with a car loan

The only valid way to fix a poor credit rating is to show your borrowing capabilities. What makes this difficult is getting approved for a credit product that can help you prove that you are a reliable borrower. Luckily, there are lenders in Australia who will work with you to secure a car loan even when your credit rating is not stellar.

Before you start making plans for your first road trip, figure out how much you can afford if you were to take on a new monthly expense. You don’t want to borrow money that you realistically cannot pay back. Also save as much as you can to use as a down payment. Putting down money up-front will help you obtain a loan with better rates.

Car loan tips

Shop around the various lenders in Australia who are offering this type of financing to find the best deal. Not only do you want a low interest rate but you also want to avoid excessive fees. Flexible repayments are also a plus. Plan yours around your paycheque to ensure that you always have the funds you need to make your repayments on time.

Once you have the loan in place, be diligent about your repayments. Being late or missing any will be counter-productive to your goal. Make extra repayments when you can but don’t pay the loan off too soon. You will want at least 12 months of steady repayments in order to make a positive impression on your credit history.

Check your credit file a few months into your loan to be sure that the car loan is showing up there. If not, talk to the lender to ensure that they are sending the relevant information to credit reporting agencies. Once you show that you are financially responsible to handle credit such as a car loan, other types of credit products will be easier for you to obtain.

What are some other alternatives to repair your credit?

There are ways other than a car loan to help you fix your credit history. Check your credit history yourself and make sure it is accurate. If you notice any erroneous bad marks against your name, get in touch with the appropriate lender to have it repaired or removed. Once a debt has been paid, the lender is obligated to update the listing. Make sure that has been done for all of your prior debts.

If you still have a number of outstanding debts, consider a debt consolidation loan. Having all of your credit bills in one account with one interest rate will make them easier to manage. There are a number of agents in Australia who specialise in providing these types of loans to credit-poor individuals in an attempt to help pull them out of debt and raise their credit rating. Research these companies thoroughly to make sure that they are offering you the best possible services at the best possible rates. Some will even go so far as to negotiate with your creditors to help reduce your amount owed.

My Credit Alert

Order a copy of your credit file

Receive email alerts whenever specific changes occur on your credit file for 12 months. You also receive a copy of your credit file despatched within one working day.

Receive your credit file with information on:

  • Details of consumer credit enquiries
  • Details of overdue consumer credit accounts
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  • Details of overdue commercial credit accounts
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  • Information on your current relationship with a credit provider
  • $79.95 p.a.

One last thing to consider: use automatic debit to make your regular monthly repayments. This ensures that you are never late or miss a repayment. You can use this option for most of your utilities as well as your credit balances. This is a good solution for borrowers who often miss repayments due to forgetfulness.

Woman thinking about loans

Some considerations before taking out a car loan

If you are struggling with a poor credit rating, consider all of your options before taking on a new car loan. While a car loan is a viable option and can show an improvement on your credit rating, it is also another financial obligation that you will have to be able to meet at least monthly. Follow these guidelines if a car loan seems like your best choice:

  • Reporting.

Make sure that the lender reports to credit agencies regularly. If they are not sending in the details of your loan and repayment history, taking on the new car loan to improve your credit will be in vain.

  • Loan amount.

Borrow only what you can afford to pay back. Now is not the time to buy an expensive car but rather a practical and affordable one. Know how much you can afford to pay monthly before you even begin shopping. This can be done by examining your budget and calculating how much extra money you have left after each paycheque.

  • Fees and rates.

Because of your special circumstances, a lender may offer you the loan but at a higher rate or with extra fees. Do your homework to find a lender that is offering reasonable rates and fees for individuals with poor credit.

  • Repayments.

Make sure that you know what your repayment obligation is going to be and that you will be able to meet that. Being late or missing a repayment will nullify your purpose of taking out the loan in the first place.

While the task may seem overwhelming, you do have opportunities to fix a credit rating that has been damaged. A car loan is a good place to start if your current financial situation can handle the new expense without pushing your credit rating further down.

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