How do I get a car loan with no credit? This is often the question of many wannabe car buyers. Getting a loan or not is often one of the biggest fears of people who want to purchase a car. This fear arises because most financial institutions don’t lend money to individuals with no credit history. It can also be due to poor credit scores, which indicate that a borrower may not be responsible for paying back the car loan on time.
If your goal is to buy a new or used vehicle but you have no credit history whatsoever, this guide is for you. We know that getting approved for a car loan is hard when you have bad credit or no credit at all. But there are options out there if you know where to look!
1. Get a Cosigner
When getting a car loan, or any loan for that matter, lenders usually look at your credit history. Your credit history gives the lender an idea of whether you are a good risk to lend money to or not. Generally, people with an excellent credit score get approved easily for a car loan with better loan terms because they have proven their diligence in paying off their debts no matter how big or small these may be.
So, what’s the minimum credit score needed for a normal auto loan? According to Experian, there is really no set minimum because lenders use different scoring models like FICO or VantageScore. It is, however, common logic that the higher your score, the better deal you’ll get. For example, if you have a credit score of 700 or higher, the interest rate for a new car is only 2.49% (as of February 2021). However, if your score is 450 or below, this goes up to 6% to 7%.
But what if you don’t have any credit history at all? If you don’t have a credit history, lenders will be more hesitant to grant you a loan. One method to overcome this hurdle is to get a cosigner. A cosigner is someone who has a good credit standing who will sign the loan with you. In essence, your cosigner is guaranteeing responsibility for the loan in the unfortunate event that you’re unable to make your payments.
For car loans, the usual choices for cosigners are parents, relatives, and spouses. You may also ask non-family members as long as they are willing to take this responsibility with you. Before signing the contract, read the fine print whether the person is listed as a cosigner or a co-buyer.
While both cosigners and co-buyers will be responsible for the loan payments in case you default on the car loan, cosigners do not have rights to ownership. Co-buyers, on the other hand, have equal ownership of the vehicle. If they are listed on the title as a co-buyer, this may limit you from selling the car in the future without their permission – even if you alone paid for the monthly payments.
2. Apply to Credit Unions, Community Banks, or Smaller Dealerships
If you’re getting disapproved for a car loan from major banks or lenders, try looking for car loan deals from credit unions or smaller banks. You could also check if you can get a loan through a smaller car dealership. Usually, these places will have more flexible rules and terms compared to major lenders.
3. Pay a Sizable Down Payment
One of the primary reasons why lenders think twice about lending to people with no credit history is that they don’t want to risk lending you such a huge amount of money without any guarantee that you can pay it back. To ease their concerns, you can save up for a substantial down payment.
The average down payment for a car was at 11.7% in 2019. If you can save up for at least a 20% down payment or even more, this will significantly reduce your monthly payments and interest rates. When you have lower monthly payments, lenders may think that you’re more likely to make the car payments.
Need help saving up for a down payment? Here are some ways on how to make $1,000 in a week.
4. Consider a No Credit Check Auto Loan
You will find ads online offering “no credit check auto loans” or “buy here, pay here” auto loan offers. Are these offers legit? Usually, a “buy here, pay here” offer means you can buy a car in-house (no lender) even if you don’t qualify for a traditional car loan. This is perfect for people who need to buy a car but the problem is they have no credit or bad credit.
The advantage of these no credit check car finance deals is that it allows you to buy a car even if you have no credit at all. Your past credit history will not be a factor in the approval process. As long as you can prove that you can pay for the car payments, then you can apply for these no credit checks auto loans.
Sounds too good to be true? You might be wondering whether there’s a catch. The answer is yes – of course, there is a catch. These no credit check auto loans do not operate because of charity. They exist to make money. That’s why most of these car dealers charge very high interest rates.
When you’re being given the sales talk, make sure you carefully read the terms and conditions. You don’t want to get trapped in a deal where you’re paying more than you should. If you’re not confident about how to evaluate whether the deal being offered is good or not, ask someone who has experience buying a car to go with you.
It is also advisable to check all your options first. Nowadays, it’s easy to find dealers online that will provide you with a pre-approval without doing a hard credit check. This way, you can do your car shopping without hurting your credit score and compare different offers from auto lenders.
5. Fund the Car Payment with a Personal Loan
Can’t qualify for a car loan with reasonable terms? One way to skirt this problem is to find a personal loan for people with bad credit or no credit. Personal loans generally have higher interest rates compared to car loans but it could be an option if you can’t find a dealer who will qualify you for a car loan.
While this may be an unconventional way to get a car, this will give you the cash to pay for the car in cash or at least for a large down payment. You can find online loans that you can pay in long-term installments (6 months to 5 years) with reasonable interest rates. There are even loans for unemployed people.
6. Check if You Qualify for Student Programs
If the reason why you don’t have a credit history is that you’re still a student, then that may work in your favor. You may not need to get your parents as cosigners for a car loan if you qualify for student car loan programs. Many dealerships usually offer car loans for college students with more flexible terms. There are some lenders that look at your Grade Point Average (GPA) instead of your credit score as a qualification point when granting you a car loan. You can also check out available car discounts for college students and recent graduates.
7. Look for Community Programs Offering Help in Getting a Car
If you are financially strapped and you’re not even sure whether you can afford a car loan, you can look at community programs that offer help in buying or getting a car. The Salvation Army, for example, usually holds car auctions where you can buy cars at very low prices. While you need to pay cash for these cars, this can save you a lot of money. Again, you could try applying for a personal loan to pay for the car you’ll buy.
Just make sure to get a seasoned car expert with you when buying a used car to make sure you’re not being ripped off and the car will be in good working condition. You don’t want to spend more on repairs than what you originally paid for.
There are also community programs targeted to vulnerable sectors of society. For example, there are programs that help single moms get a free car. If you meet the qualifications, you may be eligible to get a car for free or by just paying a minimal amount.
8. Show a Steady Source of Income
Some car lenders will be willing to overlook your lack of credit history if you can show a steady source of income. If you are a recent graduate or you just got a new job, wait for a few months until you can show that you have a stable paycheck month after month. This can show your ability to pay for a car loan.
9. Build Your Credit
Last, but definitely not least – build your credit. As mentioned earlier, your credit score at the time you apply affects what you will pay for the next 4 to 5 years. So waiting at least 6 more months to build your credit score can considerably save you a lot of money in the coming years. Ways to build your credit include the following:
- Become an authorized user on the credit card of a person with good credit.
- Get a secured credit card and make timely monthly payment.
- Don’t make any big purchases to free up your credit utilization.
- Regularly check your credit report for errors and have them fixed. You can request a free copy of your report from annualcreditreport.com
Buying a Car with No Credit History or Poor Credit
Getting a car is a necessity for a lot of people but at the same time, it’s also a major purchase. If you have no credit history, you can explore these suggestions to help you secure a car loan. Take note that building your credit first before getting a car loan is still the best option to make the car loan application easier and save you a lot of money in the process.