Depending on where you live and your situation, buying a car can either be a necessity or a luxury. You might be straight out of school, dumped into the “real world,” and find yourself needing to get around. The problem is, to buy a car, you likely need to get a car loan; and to get a loan, you need credit.
If you’ve never had or used a credit card, it’s quite likely you have no credit history on your credit report. This complicates things when it comes to getting a loan for thousands of dollars, but doesn’t make it impossible. It will require some extra effort and frustrating hoops you’ll need to jump through, but you can still get a car with no credit.
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Check Your Credit and Start Building Your History
Don’t just assume that you have no credit; know for sure what your situation is before heading to the dealership. When looking to negotiate a deal, knowledge is power, so you need to know what is going on with your score.
Get a free credit report from the three major credit bureaus. If you have never taken out a loan or credit card, it’s likely that there will be very little on your credit report. There are, though, other businesses that report to credit bureaus, such as landlords, utility companies, cell phone providers, and basically any other monthly billing agency. If these bills are in your name, you might have built up some good credit without even knowing it.
If you have no history on your credit report, you need to start building some right away. Get a credit card, make your payments on time, and be responsible. If you have an apartment, ask your landlord to report your payments to credit bureaus. If you can put off buying a car for a few months and build your credit, your loan process will be much easier.
Shop Around for Your Car Loan
At this point, you’ve started looking up cars and finding ones you like. Before you set your heart on a specific model, it’s time to find out what kind of loan you can get approved for. It’s a pretty common assumption that you can only get a car loan through a dealership, but that isn’t the case. There are actually a couple of different places to find good auto loan rates, such as your personal bank or private lenders that specialize in auto loans; they can give you a better deal than a dealership.
Check your options before choosing what loan to go with. Talk with your bank to see if they’ll give you an auto loan. You’ll be more likely to be approved by your bank than many other lenders because they can see your finances. If they see that you have a good income source and a healthy savings account, they’ll feel much more open to giving a loan then a lender without that information.
Private lenders might be more willing to give you a chance, and often are more flexible with their requirements than dealerships or banks. This flexibility might result in slightly higher payments or interest, but might make the difference between getting approved or not.
Consider Dealer Financing
Oftentimes individuals with low or no credit need to take advantage of “buy here, pay here auto loans” that are offered by dealerships. These loans are for people who have less-than-stellar credit (or none) and they generally offer high interest rates for the risk they are taking on with your credit history. You should research them and crunch numbers to see if it is right for you.
Be aware of unnecessary add-ons when considering dealer financing to avoid paying for unnecessary items, or services.
Prepare for a Larger Down Payment
If you come prepared with a large chunk of money for a down payment, many lenders will see this as a sign of financial responsibility, and be more willing to give out a loan. This is because a good down payment lowers the total amount of money lent, thus lowering the lender’s overall loss if you fail to pay them back. Lower risk equals better chances of getting approved.
This might mean you need to put off buying your car for a bit or invest a larger portion of your savings towards the car.
Buy a Cheaper Car
Alongside a larger down payment, if you pursue financing for a less expensive car, this can help you get approved for a loan. If you walk up to a lender and ask for a loan to buy a fancy hotrod, it’s likely they’ll say no. But if you instead approach a lender with a reasonable, lower-priced used vehicle, they will be more likely to say yes.
Again, a lower cost overall means a lender will be more likely to give you a loan — even though you have no credit — because it’s less of a risk for them. Buying a used car from a dealer can improve chances for getting approved for in-house financing as well.
Have a Cosigner
If somebody else is willing to take financial responsibility for you, and they have good credit, lenders everywhere will start opening up. Getting a cosigner though, is the tricky part.
The risk here is that if you fail to pay your loan, your cosigner is on the hook for the money owed. They essentially have to pay for your car if you can’t. And, if they can’t do it, then their credit takes a major hit. If you do plan on asking somebody, such as a family member or close friend, to cosign for you, make sure you can absolutely pay off the car. Forcing somebody else to pay off your car is an easy way to ruin a relationship.
Build Your Credit, Pay Off the Car
If you have no credit, and you end up getting that car loan, you now have a perfect opportunity to build your credit. People in the near future are going to be checking your credit and you need to have a good credit score. Make your car payments on time, find other ways to build your credit, and many things in life will become much easier.
Do all you can to make your payments on time. Not only is it good for your credit, but it will allow you to keep your car. Since auto loans are a type of secured loan, if you fail to make your payments, the lender will repossess your car. In a sense, the lender owns the car and you are paying them off.
Getting a car loan without credit is possible, but it will require extra sacrifices. If you can, put off buying a car until you can build your credit. If that isn’t possible, jump through those hoops and then focus on building your credit. After doing so, look into possibly refinancing your auto loan to be more favorable.
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