Buying a Car – No Credit

buy car with no creditIs it possible to get a car loan with no credit?

Yes, it’s possible and, depending on your particular circumstances, you may have several options available to you.

With no credit history, you may still have a credit score, although it isn’t likely to be very high, but enough to get you in the door with a car loan.

Since there are no hard-and-fast rules for how banks, credit unions, and auto finance companies handle no-credit situations, we’ll offer a number of suggestions, but the real secret to getting approved is to try, try, and try again at different dealers and lenders to maximize your chances.

Buy an Inexpensive Car

If you’re buying your first car and have no credit, your goal should be to minimize the amount of money you need to borrow, which will maximize your chances of getting approved. By borrowing a relatively small amount of money, you reduce the lender’s risk if they decide to take a chance on you. If you are approved, this is a good way to build your credit for the next time you need a car.

Make a Down Payment

If you can make a substantial down payment, say 20% or more,  on the car you buy you’ll have a better chance of being approved.  The reason is that the lender is concerned that you may decide to stop making payments and that will have to repossess a car that is worth less than the loan payoff. By making a large down payment, you reduce or eliminate this risk.

Borrow from a Lender You Know

If you or your family already does business with a local bank or credit union, your chances of getting approved for a car loan are much improved by getting it at the same place. Since they already know something about your family’s finances, they can be more assured of extending their business to you.

Get a Co-Signer

This is the most common way in which someone with no credit can get a car loan. A co-signer is simply someone, usually a family member, who is willing to agree to take over making payments on your loan if you fail to do so. A co-signer is usually not a co-owner. The co-signer should be aware that the debt of the loan shows up on both your and your co-signer’s credit report. This is not usually a problem unless the co-signer already has considerable debt or is looking to soon apply for a large loan or home mortgage themselves. This is a great way to build your own credit and increase your score.

Pay a Higher Interest Rate

You may find lenders who are willing to give you a car loan, possibly with a large down payment, but charge you a higher-than-normal interest rate, which increases your monthly payment and total cost. You might expect to pay 12%-20% or higher.  This is one reason that it’s so important to shop around at different lenders — to find the best rates.

Borrow from Family or Friends

This is also a very common way in which new car buyers with no credit get their first car and first loan. They borrow the necessary money from people they know. Unfortunately, this method does not help build your credit for the future, although it allows you time to get a couple of credit cards and build your credit that way. Just be sure to keep a low balance or pay off the cards each month.

Last Resort – Buy Here Pay Here Dealers

Buy-here-pay-here (BHPH) used car dealers finance their own car loans and don’t use banks or finance companies as do normal dealers. They also don’t care about credit. Unfortunately, this is a poor way to buy a car. The cars are often older worn out cars with lots of miles, often with hidden problems, that are seriously overpriced. The loans are provided at the highest interest rates allowed by law, and payment terms are very strict such that even a late payment can result in a repossession.