Borrowing money from a lender is the easiest way to purchase a car, and can often help you better afford something reliable than if you had to pay cash.
Unfortunately, without a credit history, getting a car loan can prove to be complicated. If you’ve never used credit before, or if it’s been a long time, you may not have a credit score, which most lenders require when loaning money to borrowers.
Why Does Credit History Matter?
Being responsible with your finances is something that any lender will require, and they usually look at your credit score to determine that responsibility, as well as the interest rate they may charge you.
Credit history shows any loans or credit cards you may have, your payment history, and even the amount of debt you use versus the credit you have. Lenders look at having no credit score as an indicator that you may not be a reliable borrower. Alternatively, high credit utilization can also be looked at negatively.
Without a credit score at all, it’s hard for lenders to gauge whether or not you will pay back the loan. The good news is that credit history is not the only thing that lenders look at when determining if they should loan you money. Sometimes there are ways around not having credit, like being a student, in the military, or in certain financial situations.
No Credit History vs. Bad Credit History
From a lender’s perspective, having no credit history and having a bad credit history can be different. Usually, people who have no credit history are younger and have had no need for credit or have not needed credit in quite some time.
Bad credit history shows that you have not been the greatest at repaying your credit, such as late payments, using high amounts of credit consistently, not paying at all and going to collections, or having a bankruptcy in your history.
Whether you have bad credit or no credit, a lender will be more cautious when considering lending you money. Those with bad credit often have to pay an outrageous interest rate, making the loan unaffordable. It would be beneficial to improve your credit history as soon as possible.
How to Buy a Car With No Credit History
You will find that you likely can’t get a regular loan with no credit history. However, because having no credit is a prevalent issue for many borrowers looking to purchase a car, there are options.
Get Someone to Co-sign Your Loan
When you go to a lender and ask for a car loan with no credit history, you won’t get approved on your own for a standard loan. Luckily, many lenders have the option of adding a co-signer to your loan. This helps solidify your reliability by using the credit history of the co-signer. They would need to have a good credit history to be eligible.
Remember that your co-signer should be someone you trust, and that trusts you, as they are responsible for the loan if you do not pay. It’s important to make sure not to default on the loan as this will put your co-signer in a difficult position, and if you make a late payment, this will reflect poorly on their credit history.
Provide Alternative History of Credit
While this option will not always be available, some lenders will allow you to provide other payment histories as proof of your financial responsibility. Your bank accounts can show your history of having money there, with no overdraft issues.
Some other options to show a lender how responsible you are with your money are proof of payments to a landlord, utility company, cell phone carrier, or any other situations in which you pay on time, every time.
Lenders could still charge a higher interest rate with this method, so be sure to look at all of your options, such as considering a personal loan. A car loan tends to be more rigid with its requirements, so other options may benefit your situation.
Look Into Dealer Financing Options
Many dealers specialize in lending to borrowers with no credit or bad credit, but it is essential to be wary of these options.
While using dealer financing may seem like an easy option, that may not be the case. They will still require a history of some sort, including job history and payment history. They often charge hefty interest rates and may require a downpayment.
If you can provide proof of great financial responsibility, dealer financing may work out in your favor.
Make a Big Downpayment
If you can save up some cash for a significant downpayment, this could reduce your trouble getting a loan since it means you have to ask for a lower loan amount. Even if you can get a loan with no trouble, many lenders will require a downpayment of some sort.
A down payment allows you to borrow less money, which may decrease the loan’s cost because you’ll pay interest on a smaller loan balance. Furthermore, putting money down may prevent you from going into negative equity.
Seek Out Lender Programs Catering to First-time Buyers
Many lenders specialize in first-time buyers. Since they do this every day, it means that they will be more sympathetic to your situation and may have more options for those with no credit history.
Online lenders or credit unions are great places to start because they often have options for first-time buyers. Make sure you pay attention to any requirements and fine print. Some lenders will charge excessive fees, higher interest, etc.
With any loan, research the lender’s history and consumer reviews. Looking at other consumers’ experiences that were in the same boat as you can be helpful.
How Your First Car Loan Can Help Build Good Credit History
Having a car loan is an easy way to build a credit history. If you obtain the loan and pay on time every month, you will build a good credit history. Having no credit history can affect more than just your ability to get a car loan, and building good credit history is easy, though it can take some time.
On the flip side, paying late or not paying at all can be worse than having no credit history. Be sure that if you decide to get an auto loan, you can afford it and build your credit positively, which will impact your borrowing abilities in the future.