Building Credit Through Car Loans Amid Rising Interest Rates

By Tiger Okeley, Owner of Oak Motors, a Buy Here Pay Here dealership in Indiana

The American credit market has changed dramatically over the past year. In an effort to tame rising inflation, the Federal Reserve has raised interest rates ten times since March 2021 — eventually taking rates from 0.25% to over 5% for the first time since 2007. These moves have significantly impacted the average consumer because the federal funds rate plays a central role in dictating the cost of money, from the annual percentage yields on savings accounts to the interest rates consumers pay on credit cards, mortgages or auto loans. In short, borrowing money has become much more expensive.

Challenges in the Car Market

The impact of rising rates on the car market is often underappreciated. Not only is it more expensive to borrow money, but new and used car prices are higher than ever, thanks to lingering COVID supply chain issues. That means consumers face sky-high monthly payments if they must finance a car purchase.

There’s also evidence that lenders are tightening access to auto credit by asking for higher down payments, offering higher interest rates and shortening repayment windows. Subprime auto loans have also declined, meaning people with troubled credit histories have more difficulty securing financing. All factors add up to make this a challenging time for auto shoppers.

Tips for Buying a Car in Today’s Market

If you’re in the market for a car, don’t rush into your purchase, regardless of whether you have spotty credit or perfect borrowing history. Before visiting your local dealer, take stock of your current expenses, including purchases and living style. Are you financially stable? Are you confident in your financial picture now and in the future? It’s also important to remember that we often have fewer choices when access to credit tightens and interest rates rise. So manage your expectations before you begin buying.

If you feel ready to jump into the market, consider these tips before committing to a purchase:

Buy Only if You Need To

In this economic climate, only make a large purchase if absolutely necessary, and it fits your budget. If higher rates push you outside your comfort zone, keeping your current car or exploring other transportation options may be better until conditions improve.

Don’t Live on the Edge

If your purchase is necessary, don’t live on the edge. Only buy affordable and reliable transportation, especially if you need it for work or to care for your family. That German sports car may look great in the driveway, but the extra money you’re spending could be going somewhere more beneficial.

Think Long Term

Auto loans typically span three to six years, so when you’re in the market for a car, consider your financial picture over that same period. What will your work life be like in five years? Where will you live? Will you want to start a family? These answers could greatly affect your overall financial situation.

Shop and Compare Lenders

Even buyers with excellent credit can’t negotiate their rates. Instead, rates are tiered based on the buyer’s credit score and down payment. However, you can shop and compare various sellers and lenders to negotiate purchase price, down payment, and add-ons like extended vehicle warranties.

Consider Other Expenses

Your monthly payment is only one factor of vehicle ownership. Other expenses like maintenance, gas, and insurance add to the overall cost of your car. For example, the fuel consumption differences between a mid-size sedan and an SUV could add hundreds of dollars per month to your budget. Some car models may also be more expensive to insure, which could influence your buying decisions.

Building Better Credit

An unavoidable fact is that people with challenged credit will pay more for their loans than others, so consumers must understand how credit works and how to improve their financial positions. Here are five steps to improve credit scores.

Check Your Credit Report

The first step in improving your credit is regularly reviewing your credit report. You can access a free credit report once every 12 months at, which draws data from the three major credit bureaus. This report will show your open lines of credit, how much credit you’re using, and any negative items like bankruptcies or missed payments. Checking your credit regularly is also critical for preventing identity theft because you can spot credit accounts that you didn’t open.

Dispute Credit Errors

Credit reports aren’t perfect. Errors often appear that could negatively affect your score, which determines the interest rate you pay. You can dispute credit reporting errors directly with the credit reporting agencies, which will investigate and potentially remove the incorrect information from your record.

Choose Dealers Wisely

Most auto dealerships work with third-party lenders for their auto financing, which means that people with troubled credit are often unable to qualify. By contrast, Buy Here Pay Here dealers provide in-house financing for the cars they sell, often providing loans to those who aren’t eligible elsewhere.

But a reputable Buy Here Pay Here dealer won’t just sell you any car. Instead, they’ll work with you to determine what is needed, rather than what is desired, in a car. They’ll also help you understand what you can realistically afford. It is important to choose a Buy Here Pay Here dealer that reports your loan payments to the credit bureaus, because a solid payment history will help repair credit.

Pay Down Debt

Your debt-to-income ratio, which measures the amount of money you owe versus the amount you earn, is a key factor in establishing your creditworthiness. So paying down debt is a smart strategy for anyone looking to improve their credit. The snowball method has proven effective for many people. This strategy has you pay down your smallest debt first. Then, once that debt is paid off, you add that payment to your next largest debt, continuing until you’re debt free.

Pay Bills on Time

Paying bills on time is one of the most important factors in your credit score. According to Lending Tree, a payment over 30 days late could drop your credit score by as much as 180 points and stay on your report for up to seven years.

Carefully Consider Your Next Move

Rising interest rates have broad implications for the American economy, particularly for consumers who must make large purchases. If you’re in the market for a new or used car, it’s more important than ever to work within your budget and carefully consider the long-term impacts of any potential purchases.

If you have a spotted credit history, your best financial move may be to avoid buying a car altogether until interest rates ease or you can improve your credit score. That may mean choosing rideshare or taking public transportation until economic conditions improve.

We Can’t Predict the Future

We can only guess what’s in store for the economy over the next few months. Rates may continue rising, which will further impact the automobile industry. While we can’t control larger trends like inflation or recessions, we can treat our large purchases with the care and consideration they deserve. That’s the best way to ensure a brighter financial future regardless of what happens in the broader economy.

Read Also: What Protections Does Your Credit Card Offer?


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