Will a Car Loan Help Improve My Credit if I Have Bad Credit?

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Although getting approved for a car loan when you have bad credit may be difficult, it can be done. Once approved, you're on your way to improving your credit. This is because your payments are reported to the national credit bureaus. So long as you stay current on your loan and eventually pay off the debt, your credit record will gradually improve.

Getting a Car Loan With Bad Credit

A car loan is an installment loan, which means it is paid at regular intervals, usually every month, and includes both principal and interest. Prior to being approved for a car loan, the car dealership or financing company will pull your credit report to determine your creditworthiness. Since you have bad credit, you will likely receive a loan with a higher interest rate than borrowers with good credit pay -- but if you need a car, that's better than not being approved at all.

On-Time Payments Reported to Credit Bureau

In general, having a car loan on your credit report will help improve your credit. However, making on-time payments over the life of the loan will improve your overall credit record because your payment history is reported to the national credit bureaus: Experian, Equifax and TransUnion. By staying current on your auto loan and eventually paying it off, you show future lenders that you are capable of borrowing responsibly and paying your debts. As you improve your credit, this will give you greater access to credit in the future as well as better interest rates.