How to Get a Car Loan With No Credit History
Getting a car loan may seem next to impossible when you have no credit. But if you’re willing to do the necessary legwork, including offering a significant down payment and searching for a reputable no-credit lender, you may be able to secure a loan to buy your next vehicle. Keep reading to learn how to get a car loan with no credit.
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No credit versus bad credit
There’s a big difference between a borrower with a bad credit score and one with little to no credit. Lenders consider it to be risky to lend to borrowers with a history of defaulting on their debt or making late payments. If you have managed your debt poorly in the past, lenders might not be comfortable giving you a car loan, though there are lenders who offer auto loans to bad-credit borrowers.
On the other hand, if you have a thin credit file or no credit history at all, there is nothing in your history that shows you are unlikely to pay back what you owe. You simply don’t have enough history for a lender to fairly evaluate your creditworthiness. While it can be more difficult to get a car loan when you don’t have credit, you do have options.
Financing a car with no credit
If you don’t have a credit history, you’re not alone. There are an estimated 45 million Americans who have little to no credit. It will require some work on your part, but it is possible to purchase a car with no credit. Here are the steps to take when looking for an auto loan with no credit:
Check your credit report
Your credit report contains the information that gives lenders insight into your borrowing history. A credit report includes your personal information and credit history. Consumer reporting agencies use this information to calculate your credit score. Lenders rely on this score and what’s in your credit report to determine whether to give you an auto loan.
Even if you don’t have a credit card or haven’t borrowed money before, you should always check your credit report before trying to finance a car. Mistakes happen, and your credit report could contain erroneous information. If your credit report isn’t accurate, you may be denied for a loan or receive higher interest rates.
There are three main credit reporting agencies: Equifax, Experian and TransUnion. Your reports from each may not match, so it’s important to review all three. You can receive free copies of your credit report from each bureau by visiting www.AnnualCreditReport.com.
Find your best no-credit loan
Start by establishing a budget and determining how much car you can afford. With that number in mind, you can begin investigating financing options from the following institutions:
Many car buyers finance their vehicle purchases at the dealership. Once you complete an application, the dealer facilitates the process by reaching out to multiple lending partners. If you are approved and buy the vehicle, you will make monthly payments to the lender.
Keep in mind that dealers sometimes mark up the interest rates offered by their lenders, leaving you paying more in interest. You probably won’t be able to take advantage of deals like 0% financing, which are generally reserved for buyers with significant credit histories and good credit scores.
Banks or credit unions
If you have an account with a bank or credit union, ask whether they offer special financing deals for customers with no credit. While you should expect to pay a higher interest rate than consumers with established credit, you may find lower interest rates here than at the dealer. Getting pre-approved for a car loan can save you money and make the entire car-buying process less stressful.
An online lender may be a good option when you are strapped for time. Buyers can apply online for an auto loan and receive a decision quickly. Just be sure to research the lender and read customer reviews before you share your personal data.
Negotiate a better deal
Buyers with little or no credit are often hit with higher interest rates or stricter loan requirements, such as a high down payment. But having no credit doesn’t mean that you can’t still negotiate a better deal when financing your car.
If you do your research before buying a car, you will be in a stronger position to negotiate. You can try to ease the lender’s mind by bringing other documents to the table. Recent paycheck stubs or a job offer letter may tell the lender that you have the financial means to repay your auto loan. A lender may take into account how timely you are with paying other debts and financial obligations. If you are current with your utility and phone bills, for example, consider bringing a few of these along.
Make a significant down payment
Lending to a buyer with no credit is risky. Lenders don’t want to get stuck with a car loan that isn’t repaid.
One way to ease their concerns is to make a larger down payment. Not only does this give the buyer more equity in the vehicle, but a larger down payment may also improve your chances of getting a car loan and even a lower interest rate. Since you are borrowing less money, your monthly payment will be lower.
Paying cash for a car
Some car buyers prefer to skip financing altogether and pay for the car in full if they have enough money. These customers avoid the stress of getting approved and don’t have to worry about making monthly payments.
While this strategy may work for some buyers, you can’t build credit when you pay cash. If you have a large amount of money saved, it may be better to make a sizable down payment and finance the rest. While you’ll be charged interest on the amount you borrow, making on-time payments each month will help you build credit over time.
Get a cosigner
A cosigner can improve your chances of getting approved for an auto loan. A cosigner is typically a family member or friend with a good credit history. Lenders may be more confident that you’ll repay your auto loan when you add a cosigner because it essentially guarantees that the lender will get their money. If you fall behind or default on your loan, the cosigner must make all the payments you missed or risk harming their credit score.
Wait to buy
If you aren’t in a hurry to buy a car, it’s a good idea to take some time to build your credit history. Opening a new credit card or taking out a small loan can help you establish a credit history when you have little to no credit. Your monthly payments can start to build up your credit score in as little as six months.
Just remember that just one late payment is enough to ding your score, so make it a point to always pay on time and take on credit responsibly.
Beware of “buy here, pay here” financing
Some dealerships specialize in financing auto loans for people with no credit. When you don’t have time to go through a traditional lender or don’t have the money for a large down payment, financing through a “buy here, pay here” dealer may seem like the best option.
However, buy here, pay here financing is not always as rosy as it sounds and should be avoided when possible. Dealers know that your financing options are limited when you have no credit or bad credit, and they charge higher interest rates and car prices as a result. Some dealers even install tracking devices that may disable the vehicle if you miss a payment. Not every buy here, pay here dealer reports timely payments to the credit bureaus, so this form of credit may not help you build your credit history.
Which no-credit car loan is best for you?
There is no “one-size fits all” when it comes to no-credit auto loans. Everyone’s financial situation is different. Before you step into a dealership to buy a car, do your research. You may be able to line up financing for a car through your bank, credit union, or an online lender. You may receive up to five offers by filling out a form with LendingTree.
When you explore your lending options before heading to the dealer, you can save yourself the hassle of going through the approval process at the dealership. Plus, you could get a better interest rate when you borrow from a bank, credit union, or online lender.
While getting approved for a car loan may be more difficult when you don’t have credit, it’s not impossible. Buyers with little to no credit can pursue financing options through their bank, credit union, dealership, or online lender.
Since lender criteria vary, there is no set credit score that you need to get a car loan. Generally, lenders prefer borrowers with credit scores above 660, but there are many lenders who work with bad-credit or no-credit buyers. Remember: the lower your credit score, the harder it can be to qualify for an auto loan.
Building your credit for the first time can take at least six months of reported activity before you can expect to see an impact on your credit score. This diligent work on your credit is worth it, however, as building a robust credit profile can translate to lower interest rates and higher loan amounts.