How to Buy a Car Without a Credit History
Auto Loan Expert
You’ve been looking for the right car, and you think you’ve found one that fits what you want and need. Maybe you’ve already negotiated with the dealer on the price, and now you’re ready to make the purchase.
If, like most other car shoppers, you’re going to need a car loan to pay for the car, you may be wondering if you’ll receive approval for the loan. This is an even bigger worry when you have a limited credit history or no credit history at all. That doesn’t mean that you’re out of luck, but it will make obtaining a loan more challenging.
How Your Credit History Affects Your Car Loan
When you apply for a car loan, the lender will check your credit score through one or more of the credit bureaus, and your credit history determines your score. If you have no credit history, you won’t have a good credit score. It won’t be as bad as if you’ve mishandled your finances in the past, but it still won’t be good.
The lender checks your credit to determine how likely you are to repay your loan. And while there are bad credit car loans if you have no credit history, the lender doesn’t have any evidence of how you will handle paying back a loan. They may deny your loan application because of this. If they approve you, it will be at a higher annual percentage rate (APR), because they’re taking more risk by lending to you.
Getting a Car Loan with No Credit History
There are a few ways that you can receive approval for a car loan even with no credit history.
Look for lenders in your area that offers loans to people who don’t have credit histories. There are many financial institutions that offer loans, and not all of them only lend to prime borrowers. Some focus on lending to those borrowers that don’t have good credit. Keep in mind that these lenders will charge higher interest rates.
If you can save up a sizable down payment, it increases your chances of obtaining a loan for two reasons. The first is that you’ll need to borrow a smaller amount. When you have no credit history, a lender will obviously be more willing to loan you $10,000 than $15,000. The second is that when it you can put more money down, it shows that you’re financially responsible enough to save money, which is a good sign.
The best option, though, is to get a cosigner with a good credit score. When someone else cosigns on your car loan, the lender will check their credit instead of yours. This allows you to get the loan you need at a lower APR than you could get on your own, saving you money in the long run. Family members are a good choice when it comes to cosigners. Your cosigner is putting their credit score on the line when they cosign on your loan, so make sure that you don’t miss any payments. If you do, they will be held responsible and it can negatively affect their credit score.
Improving Your Credit Score
The good news is that if you get a car loan and make your payments on time, that will improve your credit score. But you don’t want to get stuck paying too much in interest, so if you have no credit history and can’t get a cosigner, it may be best to build your credit score before applying for a car loan.
Building your credit score isn’t complicated. You just need to use credit accounts and pay all your bills on time. The easiest way to get better credit is to apply for a credit card and start using it every month. There are plenty of card issuers who offer credit cards for people with no credit history, although you’ll start with a low credit limit, likely of $500. Pay the balance in full so you don’t need to pay any interest, and avoid using more than 20 to 30 percent of your available credit. That means if your credit limit is $500, don’t put more than $100 to $150 on your credit card at any time.
You should also check your credit reports to ensure that there aren’t any mistakes that are damaging your credit scores and to see what credit scores you have. The three credit bureaus in the United States are Experian, Equifax, and TransUnion. You’re legally entitled to one free credit report from each of them per year, so make sure to take advantage of that.
Obtaining Your Car Loan
After about six months of diligently using your credit card and paying off the balance by the due date, you should have a higher credit score and will have an easier time getting a loan. You may still want to get a cosigner if possible so you can pay less in interest, but even without one, you’ll likely qualify for a loan.