How to Get a Car Loan With No Credit History
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 at all — a lender’s approval can seem a little bit daunting. But there’s good news: no credit car loans do exist. Now for the not-so-great news: they may be expensive. 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
- Check your credit score
- Financing options for borrowers with no credit
- Getting approved without a credit history
- Beware of “buy here, pay here” financing
- Which financing option is best for you?
No credit versus bad credit
Having no credit (also known as a “thin credit file”) is different than 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.
When the Consumer Financial Protection Bureau estimated the number of “credit invisible” Americans in 2015, it found that 26 million people did not have any credit history with any of the three major credit bureaus. More recent studies have shown that the problem can be traced to particular regions known as credit deserts — areas that lacked access to credit — while 22.7 million households had not used mainstream credit in the prior 12 months. Experian, one of the three major credit reporting agencies, estimates as many as 45 million Americans have no credit or thin credit files.
Check your credit score
One of the first steps before applying for any loan is to check your score and make sure any details that on your credit history report are correct. There are several ways to check your score, free, including signing up for My 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.
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 and 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. While there’s no minimum credit score needed to buy a car, borrowers with the highest credit scores will generally have the best odds for approval and the lowest interest rates.
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. Getting an auto loan can help build your credit file, putting you in a better position for future borrowing.
Financing options for borrowers with no credit
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. The first step to this is finding a vehicle and financing option you can afford. Our auto loan calculator 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, and that you probably won’t be able to take advantage of the best 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 a bank or credit union is a great option. While you might have to put some time and effort into searching, you could save lots over the years in interest. To start, check with a bank or credit union with which you have a relationship. A local credit union can be another great place to start — they generally offer lower interest rates than traditional banks, assuming you meet their membership criteria. Shopping around to compare things like interest rates, loan terms and total interest will help you score the best deal.
Online lenders: There are lots of online-only lenders offering lending services these days. 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.
Partial cash payment: Having 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. Putting down money up front can allay the effects of depreciation, keeping you from going upside down on your car loan, or owing more on a car than it is worth.
Full cash payment: 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 payment, you won’t have the opportunity to build your credit history with an auto loan. But there are other ways to get and keep a good credit score.
Getting approved without a credit history
There are ways that lenders reduce their risks, and you can use that to your advantage during your application process. Once you’ve decided which route to go with, here are a few factors to increase your odds of approval.
Find a co-signer: Having a co-signer 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 co-signer is someone that you trust and who is financially able to take on this responsibility.
Bring a down payment: As we mentioned earlier, a down payment is a great way to protect your purchase, show lenders that you’re serious and prevent an upside down loan. It can also help lower future payments, as you’ll then have to finance less. While a 20% down payment has been the standard in the past, Edmunds reports that the average down payment in 2017 was just 12%; in April 2019, the average down payment was $2,742 for a used vehicle and $4,383 for a new one.
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.
Negotiate: While it might seem old-fashioned, don’t forget to negotiate the terms of your auto loan. Interest rates and trade-in values are also up for negotiation in addition to the sticker price. Do your research, go to the dealership prepared and know when to walk away to get the best deal.
Bring documentation of other on-time payments: Sometimes, it can be helpful to bring documents to show 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.
Ask a family member: If someone in your family is able to help lend you the money for a vehicle, you could save big on interest. In a study, LendingTree found that three out of four Americans had borrowed money from a family member. While it could save you money, be sure you’re prepared to be a responsible borrower — about 27% of people who borrowed from a family member said that they had negative consequences from the transaction.
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 2.99%, albeit for those with significant credit.
Which financing option 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 the 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.