Learn How a Used Vehicle Loan Can Help Improve Credit (2025)

February 8, 2025February 10, 2025

How Used Vehicle Loans Can Improve Your Credit Score: A Step-by-Step Guide

A Used Vehicle Loan serves as a boon for people who are looking forward to purchasing a second-hand vehicle for the purposes of daily commute. However, another purpose that it serves is to improve your credit score. For that, it is imperative to have a working knowledge of credit scores such that you can ultimately use the car loan to your advantage. Read the blog to know more about it.

Understanding How Credit Scores Work

Knowing the factors that affect credit scores helps you identify how they work. This will help you take the right financial steps to get the necessary boost to your score. Factors affecting credit scores include:

Loan Repayment History (35%)

On-time EMI payment is the primary factor contributing to the determination of credit score. So, if a person wants to maintain a good credit score, it is imperative that they pay all their monthly instalments on time.

Credit Utilisation Ratio (30%)

The amount of monthly earnings that a person uses to pay off their loan is an essential point of consideration for the authorities when assigning a credit score. Hence, borrowers should refrain from availing multiple loans at the same time.

Duration of Credit History (15%)

To understand a person’s debt management capability, authorities study their credit repayment history. Hence, borrowers can refrain from closing their loan account to ensure a considerable duration of credit history for study.

Credit Mix Availed (10%)

The ability of a person to manage different types of loans (secured and unsecured loans) has a marked positive impact on their credit score. Hence, people must try to go for different types of loans, instead of sticking to a particular credit type.

Application of New Credit (10%)

Application of a new credit score is associated with a hard inquiry from the lender’s end before approving the borrower’s request. Multiple such hard inquiries can negatively affect the credit score as borrowers are projected as credit-hungry individuals.

Availing a used vehicle loan can help you improve your credit score, getting several associated benefits.

How a Used Vehicle Loan Can Help Build or Improve Credit Score?

Following are some of the ways in which a used vehicle loan can help build or improve the credit scores of borrowers:

Establishment of Credit Mix

Applying for a used vehicle loan allows borrowers to establish a much-needed credit mix. This can give the necessary boost to their credit score.

Setting Up Repayment History

If a person has not availed any credit previously, this credit type can allow borrowers to make on-time EMI payments and set up a robust repayment history, thus building a good CIBIL score.

Reduction of Credit Utilisation

A used car loan does not have a significant impact on the credit utilisation ratio unlike other forms of credit, but helps maintain a healthy credit profile.

Once you are aware of the ways in which a second-hand car loan can help improve credit scores, you can follow the steps associated to reap the benefits.

Steps to Use a Used Car Loan to Improve Your Credit Score

Listed below are the steps that one can follow to use a car loan to notably improve credit score:

Choose an Affordable Loan

First and foremost, research the amount, interest rate, and loan duration to optimise them and attain an affordable EMI. This will help you repay your loan on time, without any financial constraints.

Set Up Automatic Payments

Paying monthly instalments on time is imperative to improve your credit score. So, set up autopayment of the EMI such that you will not have to undergo the hassles of remembering every month to pay the instalments.

Monitor Your Credit Score Regularly

Make sure to review your credit report every month so that you can easily keep track of your credit score. This will help you see if your efforts are having a positive impact on your CIBIL score or if you need to make some improvements in your strategy.

Once you achieve an excellent credit score with the help of car loans for used cars, you can unlock the door to a plethora of benefits.

Benefits of a Higher Credit Score from a Car Loan

Here are the advantages of a higher credit score achieved with the help of a pre-owned car loan:

Easy Access to Various Credit Types

Once you have established a good credit history and an excellent credit score with the help of a used vehicle loan, you can easily get approval for other types of loans such as loans against property, home loans, personal loans, and so on in the future.

Lower Interest Rates on Future Loans

A higher credit score projects a loan applicant as a reliable borrower. This allows them to negotiate with the lender for lower interest rates on their loans, and thus save substantially on their credit repayments.

Enhanced Financial Credibility

An excellent credit score improves the financial credibility of a borrower. Thus, they can request higher loan amounts and improved repayment terms, and get approval on the same without much hassle.

Access to Pre-Approved Loans

With a good credit score, you can get access to pre-approved loan offers from reputed financial institutions. Thus, you can finance your immediate monetary requirements or pay for your big-ticket purchases without any hassle.

Increased Credit Card Limit

If you have a good credit score, you can get access to higher credit card limits and premium credit cards. This opens the door to a plethora of benefits that are associated with such premium cards.

Many times, people make some mistakes when managing a used car loan. Staying aware of them ensures their reduction as much as possible.

Common Mistakes to Avoid When Managing a Used Car Loan

Listed below are some common mistakes that you must avoid when managing a used car loan to make the most out of it:

Avoid Missing Out on Payments

Make sure that you do not miss out on your monthly instalments when repaying your credit. For this, you can set up an auto payment or simply set a reminder to get notified when the due date of the payment approaches.

Avail Loan Amount Within Your Budget

Always stick to your budget when applying for a loan such that you do not face any financial constraints. For this, you can use an online EMI calculator that will help you determine the applicable monthly instalment and accordingly, you can apply for a loan.

Refrain from Paying Penalties

If your lender charges penalties for prepayment or foreclosure of your loan or for missing out on EMI payments, make sure to avoid them. This will help you save substantially on the additional charges as well as safeguard your credit score.

Conclusion

Once you know how a Used Vehicle Loan can help you build your credit score, you can make the right strategies to improve it. After that, you can access a plethora of benefits that a high credit score is associated with. To enhance the benefits of this type of credit, make sure to connect with reputed financial institutions like Kogta Finance, which offers improved terms on loans.