Job seekers, who face one rejection after another because they lack experience are often left to wonder in frustration, “How can I gain any experience if no one gives me a shot?”
There is a similar frustration for young adults when it comes to credit. How can one establish a credit history, proving they will pay back their debts, if no one will give them a loan in the first place?
Many people stress over whether they have good credit or bad credit, but it becomes even more stressful when you don’t have credit at all. When it comes to lenders, a nonexistent credit history lumps a borrower in a similar category as those with bad credit, which seems unfair but it is a reality. If lenders cannot see evidence that you have a track record of paying your debts, they see you as a risk.
For young adults who need to purchase a car, either to commute to college or work or both, this can be particularly frustrating. A car loan may seem impossible to secure without an established credit history.
While it is difficult it is not entirely possible, and we will walk you through what you need to know about getting a car loan with no credit.
Option 1: Finance through Your Bank or Credit Union
Since most young adults have a checking and/or savings account, even if they have not yet opened lines of credit, you can go to your bank and ask if you can prequalify for a car loan, which in turn will dictate your budget when you go car shopping.
Credit unions often offer financing options with lower interest rates, so if you can qualify for membership in one, this can be a great place to start. In addition to banks and credit unions, you can also investigate online lenders.
A word of caution when it comes to any online lender is to research thoroughly and look at customer reviews. Beware of giving out your personal and financial details too quickly, before verifying the lender is credible and reliable as you pursue auto financing options.
Option 2: Finance through the Dealership
In some cases, buyers will finance a car loan directly through the dealership. This may seem like the easiest car financing option to buy a car, by choosing your vehicle and working out a financial arrangement all in one place, but it does not come without a cost.
The dealer is essentially the “middleman” between you and a lender. Even though fast loan approval feels nice, they will often give you a higher interest rate on top of what would already be attached to the loan. A lower interest rate is what you should be looking for, so pay close attention to financing terms when going through a dealership!
Option 3: Attach a Co-Signer to Option 1 or 2
Whether you finance through a bank, credit union, or auto dealer, you may be able to secure a much better interest rate if you bring on a cosigner.
This would be someone else with an established and perfect credit history (or at least, a good credit score) who would also be responsible if the debt was not repaid.
The lender would be more likely to extend the loan in this case, since someone with a positive credit rating is now invested in the ultimate repayment of the loan.
These three options may help you secure a car loan with no credit if you absolutely need to move forward with one before establishing credit. A fourth option we want to point out is that you could simply wait.
Should I Wait?
Waiting may not be the answer for everyone, but it is worth considering. If there is any way to utilize public transportation, carpools, etc. to get to your work and school, it may serve you well to try and establish credit before seeking a car loan. Here are some ideas for what you can do to be proactive during this waiting period:
Save Every Extra Penny
If you can put aside some money long enough to save up a substantial down payment, this could have a huge benefit when it comes to purchasing your car. You may be able to negotiate a much better deal overall, and you would not need to take as long to pay off your loan.
Apply for a Secured Credit Card.
You can start to build a credit history with a secured card (one that you pay a deposit to open).
Hone Your Negotiation Skills
While your limited credit history may mean you are stuck with higher interest rates on auto loans, you could at least find ways to lower the overall purchase price. Negotiating for a lower purchase price should always be a priority among new (and used) car buyers.
The Six-Month Mark and Credit Scores
Once you have opened a line of credit, such as a secured credit card, it will take approximately six months to establish a credit history. This is when you should start to check your credit score, and you should continue to monitor it as you prepare to try for an auto loan.
FICO scores are broken out into five categories, outlined below. You will not jump right to the excellent tier after six months, but over time you can get yourself into the top two tiers with on-time payments and a good mix of credit accounts.
300-579: Very Poor
Borrowers in this range have a bad credit score and are typically rejected by lenders. If they are approved, they will likely be required to pay some type of initial fee or upfront deposit to secure a loan.
Borrowers who fall into this category may also be referred to as “subprime borrowers.”
In this range, borrowers are more likely to be approved for loans, but not always at the best rates.
740-799: Very Good
This category finds borrowers receiving much better interest rates on loans.
This is the ideal scenario for a borrower, and a lender, too, who has great assurance the money will be paid back.
Car Loans with No Credit History: Final Thoughts
It will not be easy to get a car loan with no credit history, so wait and establish a credit history first if you can.
If this is out of the question, be sure you fully understand the terms of the loan before you sign, knowing that interest rates and other penalties will be high. You must have a solid plan in place to repay that car loan so it does not damage your credit history as soon as it starts.