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How to Get a Car Loan With No Credit History

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When you’re first starting out, a car can make all the difference in getting to work or school, and sometimes a loan is just what it takes to afford one. But when you don’t have a significant credit history — or any credit history at all — a lender’s approval can seem daunting.

There’s good news: No-credit car loans do exist. But now for the not-so-great news: They may be expensive. Still, even though it may be more difficult to get a traditional car loan with no credit history, we’ll give you some tips to make this process easier.

No credit versus bad credit

Having no credit (also known as a “thin credit file”) is different from having bad credit. You might not have a credit history if you don’t have a credit card or haven’t borrowed money from a bank. With bad credit, you do have a history of borrowing and have made some mistakes along the way.

The Consumer Financial Protection Bureau (CFPB) estimates that there are 45 million “credit invisible” Americans who do not have enough of a credit history to earn a score with any of the three major credit bureaus. A 2017 CFPB study showed that the problem can be traced to areas known as “credit deserts” — neighborhoods where people lack access to mainstream, low-interest sources for borrowing money.

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How to get a car loan with no credit

Even if your credit history is thin, it’s important to first check your score and make sure any details that are on your credit report are correct before applying for any type of loan.

Check your credit

There are several ways to check your score, free, including signing up for LendingTree. It’s possible that if you’ve never had a credit account before, you may not have a score available — after all, a score can’t be calculated if there’s no history there. You can check your credit report at AnnualCreditReport.com.

If you’re new to credit scores, think of credit scores as similar to a grade point average in school. They’re calculated by looking at all of your credit accounts and borrowing history, then combining that information into one number. Credit bureaus may look at things like your payment history, number of accounts open, the amount you owe on each account and more.

Experian, one of the three major credit reporting agencies, and FICO launched Experian Boost and ultraFICO respectively in 2019 to help people raise their credit scores. These programs are free and consider your banking history plus alternative financial information, such as your payment history for rent, utilities and even subscription services like Netflix, to help build a credit profile. Note, however, that Experian Boost only impacts certain types of credit scores — lenders may use a different scoring model or not utilize the ultraFICO score.

Getting credit can sometimes feel like a situation where you have to have credit to get credit, but that’s not always the case. After all, everyone starts somewhere. And no, you don’t start at zero — when it comes to a starting score, you don’t begin at the bottom and work your way up, nor do you start with a perfect score. Everyone’s score is different, and it generally starts somewhere in the middle. And while borrowers with the highest credit scores will generally have the best odds for approval and the lowest interest rates, there’s no minimum credit score needed to buy a car — plus, getting an auto loan can help build your credit file, putting you in a better position for future borrowing.

Find your best no-credit car loan

Getting that first car loan can be an exciting and important step toward building your credit history. Done right, it’ll help open doors to future borrowing. It begins with finding a vehicle and financing options you can afford (our auto loan calculators can help you put figures into perspective). Once you have your budget down, here are a few ways to consider financing your purchase.

Dealer financing

If you’re planning on buying a car from a dealer, there will likely be financing options available to you there, even if you don’t have a credit history. Financing through the dealership is often a convenient way to get a car and a car loan in the same place. However, bear in mind that dealers sometimes mark up the interest rates offered by lenders, leaving you paying more in interest. You probably won’t be able to take advantage of deals like 0% financing — those offers are generally reserved for buyers with significant credit histories.

Banks or credit unions

If you want to avoid that markup a dealership might charge you, getting pre-approved by your own bank could save you in interest fees over the years. A local credit union can be another great place to start — you’ll have to meet their membership criteria, but credit unions generally offer lower interest rates and better chances of approval than some other lenders.

Online lenders

There are lots of online-only lenders offering auto loans and other banking services. But before giving out any personal information online, make sure to do your research on the lender and vet them thoroughly. Without brick-and-mortar locations, you’ll want to check for reliable customer service and reputable reviews.

Negotiate a better deal

While it might seem old-fashioned, don’t forget to negotiate the terms of your auto loan. Sticker price and trade-in values are also up for negotiation. Do your research, go to the dealership prepared and know when to walk away to get your best deal.

Bring documentation of other on-time payments. One way to negotiate a better auto loan is to bring documents showing that you’ve been able to make other payments on time. Have a bill for internet service or other utilities? That could be a place to start. Or bring pay stubs or a job offer letter — these could help prove a steady income.

Make a significant down payment

Making a large down payment can often show lenders that you’re serious. From a lender’s perspective, a significant down payment shows you’re a safer bet to repay the loan. But from your side, there are benefits to this as well. Cash upfront can allay the effects of depreciation, keeping you from going upside down on your car loan (owing more on a car than it is worth).

How much is enough? While a 20% down payment has been the standard in the past, Edmunds reports that the average down payment in 2019 was just 11.7%. At the end of 2020, new-car buyers were paying about $4,700 on average, while used-car buyers paid about $3,300.
Paying cash for a car

Paying for your car entirely in cash isn’t something everyone does, but it is possible, especially if you’re willing to consider a used car (used is almost always going to be cheaper than a new car). If you’re an aggressive saver and someone who knows how to put money away, this will help you skip a loan altogether. While you’ll have the benefit of never having to think about a car payment, you won’t have the opportunity to build your credit history with an auto loan. There are other ways to get and keep a good credit score.

Ask a family member for the cash. If someone in your family is able to help lend you the money outright for a vehicle, you could save big on interest. More than half of Americans have borrowed from or loaned money to a loved one, according to a LendingTree survey. While it could save you money, be sure you’re prepared to be a responsible borrower — family loans can often lead to remorse.

Get a cosigner

Having a cosigner on a loan helps reassure your lender that you’ll be able to pay it back — after all, this person takes equal responsibility for your loan. That means that the account shows up on both of your credit reports, and anything that happens with the loan could affect you both. Make sure that your cosigner is someone you trust who is financially able to take on this responsibility.

Wait to buy

If you don’t need a vehicle now, waiting to buy can be a great way to spend less in interest. Focusing on building your credit score can help to lower potential interest rates, and save you money in the long run. Some options for building credit include applying for a secured credit card, or becoming an authorized user on another credit card.

Beware of “buy here, pay here” financing

If you’re searching for car loans without credit checks, it’s likely you’ll come across “buy here, pay here” dealerships in your research. These dealerships are generally aimed toward those with bad credit or no credit history. They work by making loans in-house to customers who may not be easily approved through traditional financing options, but they’ll often charge sky-high interest rates in exchange for their services. It’s not uncommon for these dealerships to charge 20% APRs or higher, though the maximums vary by state. By comparison, we found credit union rates as low as 2.14%, albeit for those with significant credit.

Which no-credit car loan is best for you?

There’s no set solution that works for everyone. Most importantly, look at potential auto loans from a big-picture, long-term perspective. Instead of just looking at monthly payments, consider the amount you’ll spend on interest over the whole life of the loan, and get to know all the moving parts that can cost you over the years. Then, shop around to find your best rates. Be realistic about your credit situation, and if possible, consider waiting to buy and build credit. Any way you choose, know that your auto loan is the first step on your credit journey — make it a positive one, and you could have many greater opportunities to borrow in the future.

 

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