Why a Car Loan is Often the Easiest Path to Credit for New Immigrants, But Not The Best

By Julien Brault, founder of MooseMoney.

When you arrive in Canada with no domestic credit history, a car loan can help build your credit score. Auto lenders report every payment to Equifax and TransUnion, and because the vehicle itself acts as collateral, many types of auto lenders are willing to approve borrowers who have zero Canadian credit data. Major banks including RBC, CIBC, TD, Scotiabank, and National Bank all run newcomer-specific auto financing programs with loans up to $75,000 and terms ranging from 12 to 96 months, often requiring no Canadian credit history at all. 

However, while a car loan is one of the most accessible forms of credit for newcomers, it is not the most cost-effective way to build a score from scratch. A secured credit card can accomplish the same credit-building goal at a fraction of the cost and without the risk of owing more than your vehicle is worth.

"A 'no hit, no score' status occurs when a credit bureau has no record of an individual, which is a common occurrence in the cases of newcomers to Canada. It doesn't mean your credit is good or bad; it simply means there is zero data available to make a financial assessment," said Richard Goyder, Chief Credit Officer at Neo Financial.

That blank file is the core problem. Canadian lenders rely on credit bureau data to approve everything from cell phone contracts to mortgages, and a newcomer with no file gets treated as an unknown risk. Building data points as quickly as possible is the priority, and any product that reports to the bureaus will help.

Why Auto Lenders Say Yes When Others Say No

Car loans are secured debt. The lender holds a lien on the vehicle, which means it can repossess the car if the borrower stops paying. "Since auto lenders report to the bureaus, a car loan is a great signal that someone was willing to lend you money and that you are making the payments. It is often easier for a newcomer to get a car loan, because the vehicle serves as an asset the lender can repossess," explains Richard Goyder.

Jeff Schwartz, Executive Director of Consolidated Credit, agrees that the collateral element is key. "A car loan will be easier to get by someone with no credit history, because it's a secured asset that can be taken as collateral if they stop paying the loan. But there are better options for new immigrants to build their credit and that's a secured credit card, where they put down a deposit and they have up to that deposit to spend each and every month. And the benefit of that is it constantly builds up your credit over time," he explained.

The Hidden Cost of Long Loan Terms

Dealerships frequently steer newcomers toward extended financing terms because the monthly payment looks more affordable. Schwartz cautioned against this approach. "They extend the term of the car loan to a point where the payment is low, but the ultimate value of the car is diminished at the end of it. They'll last up to 84 months, which is not a great idea considering that toward the end, you're driving an old car and you're going to have all sorts of issues with it and you're still paying it off," he noted.

Newcomers should aim for the shortest term they can reasonably afford, ideally 60 months or less, and factor in insurance, fuel, maintenance, and provincial registration fees before committing to a monthly payment.

A Secured Credit Card Can Do the Same Job for Less

Every monthly car payment reported to the credit bureaus adds positive data to a newcomer's file. But a secured credit card does the same thing without thousands of dollars in interest charges and without the risk of negative equity.

A secured credit card requires a refundable deposit, which typically becomes the card's credit limit. The cardholder uses the card for everyday purchases, pays the balance on time, and the issuer reports that activity to Equifax and TransUnion each month. The cost is minimal compared to an auto loan because the cardholder can pay the statement balance in full every billing cycle and avoid interest entirely.

Richard Goyder described the mechanics. "A secured credit card is a very straightforward way for a newcomer to establish his credit in Canada, because if they have enough money to put a deposit down, then they can get a credit card that they can use and within three months, we will be in a position to be able reassess them and decide whether they can have some unsecured credit as well," he said.

The Secured Neo Mastercard is one example of this type of product available to newcomers in Canada. It reports to the major credit bureaus and allows cardholders to start generating a credit history immediately, with the possibility of graduating to an unsecured card once a positive payment track record is established.

For newcomers who genuinely need a vehicle, combining both strategies can accelerate credit building. An installment loan like a car loan and a revolving account like a secured credit card represent two different types of credit. Having both reported on a credit file can improve the "credit mix" component that scoring models evaluate, potentially boosting a score faster than either product alone.