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 auto loan on time.
When getting an auto loan, or any loan for that matter, lenders usually look at your credit report. Your credit record 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 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.
If your goal is to buy a new or used vehicle but you have no credit record 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!
Steps to Buying A Car With No Credit
If you don’t have a credit history, here are the steps to help you get an auto loan:
Make A Significant Downpayment
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 a huge amount 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 for car loans with no credit. 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.
Gather Documentation
If you have no credit record, some lenders may take other factors into consideration. They will check other aspects of your finances to determine if you can afford the payment.
Make sure to gather important documents to confirm that you’re capable of repaying your debt. These include a copy of your bank statement, utility bills, phone bills or documentation of other recurring bills, pay stubs, and proof of employment history. It’s even better if you’ve been with a single employer for a long time because it’ll show the lender that you can hold a long-term job.
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’re 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 an auto loan.
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 auto 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 auto loan, cosigners don’t have rights to ownership. Co-buyers, on the other hand, have equal ownership of the vehicle. If they’re 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.
Can you get a car loan with no credit and no cosigner? Yes, but you have to look beyond traditional banks and lenders. You may seek out alternative lenders, such as those that offer payday loans or personal loans.
Places that Help to Fund Your Car Purchase with No Credit
Buying a car is an exciting experience. If done right, getting auto financing can help you build your credit. If you have no credit history and you can't secure a loan from traditional banks, then here are the alternatives that you may want to consider.
1. Consider Community Banks and Credit Unions
If you’re getting disapproved of car loans from major banks or lenders, try to find auto loans from a community bank or credit union. They’re more lenient in their loan requirements compared to traditional banks. Since you don’t have a credit record, the credit union will consider other factors, such as your job stability.
2. Consider Dealer Financing
You could also check if you can get a loan through a smaller car dealership. Usually, these places will have more flexible rules and loan terms compared to major lenders.
You’ve probably seen ads that say you can still take out an auto loan even if you don’t have a credit history. These ads are from car dealerships that accept no credit. Although it’s a convenient way of getting a car, you’ll have to face higher interest rates than what typical lenders offer.
3. 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 loan if you qualify for student car loan programs that have low car payments, no credit offers.
Many dealerships usually offer car loans for college students with more flexible terms. Some lenders look at your Grade Point Average (GPA) instead of your credit score as a qualification point when granting you a vehicle loan. You can also check out auto financing and available car discounts for college students and recent graduates.
4. Fund The Car Payment With A Personal Loan
Can’t qualify for a first-time 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 auto loans but it could be an option if you can’t find a dealer who will qualify you for a 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.
5. Look For Community Programs Offering Help In Getting A Car
If you’re 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 at 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.
6. 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 auto 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 don’t 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’s also advisable to check all your loan 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.
Alternatives to Getting a Car Loan for People with No Credit
There are other alternatives to getting an auto loan. Before you submit an application, you can explore other options that don’t require making a downpayment or paying interest rates.
Ask Family and Friends
If you can’t get an auto loan or before you apply for one, you can also ask your family and friends for financial help. It’s a good option especially if you don’t have a credit history. This could help you save a lot of interest. Just make sure to be a responsible borrower so you don’t destroy family relationships.
Tap Your Retirement Account
If you have no credit history but you’ve started to put away cash into your retirement account, you may be able to use that to purchase a car. It’s not something that you’d like to do since you're saving up for your future, but it would be a good option if you make sure to pay back the money you took out from your retirement account.
Before you do that, make sure to check the fine print. Some retirement accounts may allow you to borrow money without any additional cost while others impose fees and penalties. Likewise, there could also be a limit on the amount you can borrow from your retirement plan. That’s why you need to make sure that the money you’ll get is enough for the price of the vehicle you want to purchase.
Pay Cash For A Car Instead Of Getting A Loan
Although it’s uncommon, paying for a car in cash is another option if you have no credit history. It’s an excellent alternative, especially if you’re open to considering getting a used car since it’s cheaper than buying a new one.
If you’re someone who is an aggressive saver and you managed to set aside some cash, then you can use this instead of taking out a loan. Note though that while you don’t have to worry about making monthly car payments, you won’t get the chance to build your credit history.
Wait To Buy
Delay your purchase and 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.
The credit score needed for a car loan without a co-signer is significantly high. 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 payments.
- 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
If you don’t have an urgent need for a vehicle right now, you should wait to buy. During this time, you can focus on building your credit. Once you have a good credit score, you can apply for a loan and get a higher chance of obtaining a lower interest rate and saving cash in the long run.
FAQs on Getting a Car Loan With No Credit
What’s the difference between no credit and bad credit?
Having no credit history or having a bad credit score can make your financial life a bit complicated. Having no credit history doesn’t mean you have bad credit. When you have no credit, lenders don’t have a way to determine your behavior as a borrower. It’s not the same as having bad credit, which means your credit report is filled with major blemishes. Generally speaking, having no credit history is better than having a credit report that’s filled with negative marks.
How hard is it to finance a car with no credit?
Making an auto purchase or finding a lender that can finance your car is made much more difficult if you have no credit history. You’ll be considered as a riskier candidate compared to loan applicants with credit scores. If you get approved, you’ll pay higher interest rates than someone who has a history of making on-time payments.
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%.
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. Save for a down payment and look for other auto financing options. Take note that building your credit first before getting a loan is still the best option to make the loan application easier and save you a lot of money in the process.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
