Buying a car can feel complicated. Financing often comes with moving parts, and it’s normal to have questions as you sort through them. One question a lot of buyers ask is, “Does a car loan build credit?”

The short answer is, in most cases, yes. We’ll break it all down to give you a clear understanding of how, but first, let’s cover the pros and cons of using an auto loan to build credit. 

We’ll round that off with some tips, tools, and resources to help you on your car-buying journey.

Pros and Cons of Using an Auto Loan to Build Credit

Using an auto loan strategically can be an effective way to establish or strengthen your credit. Still, it’s important to understand both the advantages and the potential drawbacks before deciding whether this approach fits your financial situation.

Keep in mind that every loan, lender, and borrower combination is unique, so take a close look at your own situation before signing.

Benefits vs. Costs of Car Loans

CREDIT SCORE AUTO LOAN PROS	CREDIT SCORE AUTO LOAN CONS
Builds a consistent payment history. On-time payments are the most important part of your credit score, and an auto loan creates a steady track record lenders can see.	Rates may be higher if you’re building credit. Borrowers with limited or lower credit scores sometimes receive higher APRs, which increases the total cost of the loan.
Adds variety to your credit mix. Installment loans count differently than credit cards, which can help scoring models view your profile more favorably.	Missing payments can harm your score. Late or missed payments on an auto loan can cause significant credit damage, especially early on.
Creates long-term credit data. Because auto loans typically span several years, they help demonstrate reliability over time.	You may owe more than the car is worth. With higher prices and longer loan terms still common in 2025, negative equity remains a risk.
May improve your score sooner if you’re new to credit. Borrowers with little or no credit history often see positive movement faster because they’re building from scratch.	The loan becomes a fixed monthly obligation. If your income changes or unexpected expenses arise, the payment can strain your budget.
Can help you qualify for better rates later. Stronger credit can unlock lower interest costs on future loans, refinancing, or credit cards.	Early payoff may reduce the credit-building benefit. Paying off the loan too quickly shortens the positive payment history you’re trying to build.

 

 

 

 

Using an auto loan to build credit can be a smart strategy, but it works best when the payment comfortably fits your budget and you’re confident you can stay on schedule each month. 

We recommend taking some time to consider these factors in the context of your life and financial situation. Feel free to ask for help, that’s what Valley Credit Union is here for!

How to Use an Auto Loan to Build Credit Successfully

If your goal is to use an auto loan to strengthen your credit, the way you manage the loan matters just as much as the loan itself. A well-structured approach can help you build positive history, stay on track, and avoid common pitfalls that slow down credit improvement.

Choose a Payment You Can Comfortably Afford

Your payment history has the biggest impact on your credit score, so the most important step is choosing a monthly payment that fits your budget every single month. A payment that feels manageable helps you stay consistent without stretching your finances too thin.

Pick a Loan Term That Supports Your Goals

Longer terms can make payments smaller, but they also increase overall interest costs. Shorter terms cost more per month but help you build equity faster. Choose a term that’s affordable and compatible with long-term financial health.

Make Every Payment on Time

Even one late payment can slow down credit improvement or bring your score down. Setting up autopay or calendar reminders helps ensure you never miss a due date. Your lender reports your payment behavior monthly, so consistency is key.

Avoid Borrowing More Than You Need

Financing the right amount helps you avoid negative equity and keeps your monthly payment sustainable. It also protects your overall credit profile by reducing financial strain.

Keep Other Debts in Good Standing Too

Credit scores reflect your entire credit picture. Staying current on credit cards, student loans, and other obligations helps you see the full benefit of a well-managed auto loan.

Check Your Credit Regularly

Reviewing your credit report helps you catch mistakes, track progress, and understand how your payments are being reported. Many credit unions, including VCU, offer tools that make this easy.

Using an auto loan intentionally and responsibly can help you build a stronger, more resilient credit profile. With the right structure and steady payments, your credit can improve steadily throughout the life of the loan.

FAQs About Car Loans & Credit Scores 

Now that we’ve covered the pros and cons of auto loans as they relate to your credit score, let’s answer some of the most common questions about auto financing and its impact on creditworthiness.

Does a car loan build credit?

Generally, yes. An auto loan can help improve your credit score because it gives you the chance to build a strong record of on-time payments. Payment history remains the most influential factor in credit scoring. When you make your monthly payments on time, you’re showing lenders that you can manage a long-term loan responsibly.

How does having a car loan help build your credit?

Having a car loan shows that you can repeatedly meet your debt obligations over an extended time horizon. Having a strong credit legacy is great in and of itself. But it’s also a predictor of the future likelihood that you’re a good credit risk. Altogether, this bolsters your credit score and puts you in a better position for your next foray into borrowing.

By taking on an auto loan, you may also be diversifying the kinds of debt you have. When you pay your loan per the terms of the lending agreement, you exhibit your ability to handle different kinds of credit. Prospective creditors view this favorably.

Does applying for a car loan impact my credit score? 

You might see a small dip at the beginning because applying for a loan comes with a hard credit inquiry. That decrease is usually temporary. Once your payments start posting, most borrowers see steady improvement as their credit mix expands and their track record grows. Modern scoring models like FICO 10T and VantageScore 4.0 look closely at consistent repayment patterns. This makes installment loans useful tools for building or rebuilding credit.

Can financing a car build credit if you have no credit history?

Yes, but it may be more difficult or require some additional steps or guarantees to secure a loan if you have no credit baseline.

Once you’re approved, though, an auto loan can be a straightforward way to start building credit. The key is making full payments on time every month. Doing so creates terrific fiscal habits that prove you’re responsible and able to manage debt.

How fast will a car loan raise my credit score?

How quickly your score improves depends on your starting credit profile. Borrowers who are establishing credit can see gains sooner, while those with already strong credit may see slower movement. 

If you have consistently good credit, your score will nudge up eventually. Car loans aren’t a quick fix; they’re a long-game strategy. Conversely, if you have bad credit or negative actions on your credit report, it could take a while. For “lesser” infractions, it could take somewhere around three months to recover. Bigger issues, like bankruptcy or missing mortgage payments, could take years to recover from.

Either way, a well-managed auto loan is a dependable way to strengthen your credit over time. This sets the stage for deeper questions about how auto loans work, how scores change over the life of the loan, and what factors help or hinder your progress.

Is it normal for my credit score to dip slightly after paying off my loan?

It’s a little counterintuitive, but when you pay off your loan, your credit score may actually drop slightly at first. This dip is due to the way credit scores are calculated. FICO (the company that determines credit scores) uses an algorithm that prefers active lending accounts over closed ones.

Thankfully, if you stay on top of your credit obligations (e.g., credit card bills, mortgage, loans, etc.), your credit will rebound fairly soon. You’ve established a track record of fiscal responsibility — and lenders and credit rating agencies love that. The net effect is that your credit score may go up in the long run. Additionally, prospective creditors will see your lengthy history of on-time payments, which will reflect positively on you.

What are the disadvantages of paying off a car loan early?

There are some other potential downsides to repaying your loan before the originally agreed-upon due date. Here’s the quick list:

• Temporarily credit dip
• Possible prepayment penalties
• Losing cash you may need elsewhere

Don’t let this scare you away from paying your loan back in less time, if it’s a prudent thing to do in your case.

Related: How to Pay Off Your Car Loan More Quickly

Why You Should Get Your Car Loan from VCU

Whether it's a new loan or you’re refinancing, working with a credit union for your car financing will yield so many benefits. Here are the biggest reasons why heading to a credit union, such as Valley Credit Union, instead of a traditional financial institution for your auto lending needs may be a smart move for you:

• You’ll save money with lower interest rates and fees.
• The application process is shorter and faster.
• It’s easier to qualify.
• You get more flexible and customized terms.
• You get personalized service from knowledgeable experts who care about you.
• You’ll be able to take advantage of financial safety nets like Skip a Payment and debt protection programs.
• Helpful planning tools and resources and convenient banking options.

Plus, credit unions offer exclusive perks, like member dividends, and have a community focus. They’re in it for the people (you), not profits.

Related: How to Get Pre-Approved for a Credit Union Auto Loan

VCU Makes Car Buying Even Easier

The fundamental benefits of joining a credit union are substantial and attractive. As if they weren’t enough to entice you, VCU also offers some other resources that will come in handy as you’re going through the car-buying process.

• Auto Consulting services
• Mobile and Online Banking to Online Bill Pay your loan (There are tutorials for these tools!)
• Text Valley — a text-message-based way of handling certain loan-related tasks
• Credit reports and more

From advising to pre-approval and refinancing to repayment, credit unions can make the vehicle financing process more accessible, understandable, and pleasant.

Valley Credit Union, Paving the Road to Financial Success

Does getting a car loan hurt your credit? No. Can financing a car build credit? Yes. Will getting a new auto loan from VCU raise your credit score faster and in a more manageable way? It’s highly likely.

This is because we offer you products and services designed for your needs. On top of that, we provide the tools, resources, and knowledge you require to make the best possible financial decisions for yourself.

We’re here to support you every step of the way, especially at the milestone moments in life. Contact us today to see how we can help you get that new car, strengthen your credit, and solidify your overall financial well-being.

About the Author

 Justin Roberts, Vice President of Lending

Justin Roberts is our Vice President of Lending and has been in the financial industry for over 18 years. He is an Oregon State University Graduate and has just completed Western CUNA Management School. When he is not focused on helping the members at Valley, you will find him coaching his two sons and volunteering his time to help develop the youth in our communities through sports.