Starting from Zero: Financing a Car When You Have No Credit History

Are you searching for a new car but confused about finance? Are you struggling to see a way forward with no credit history? Buying a car is an exciting time, but it can also be confusing and stressful. While unlimited funds will get you the vehicle of your dreams and a perfect credit score is a huge advantage, not everyone is lucky enough to be in this position. Whether you’ve just left home, migrated from overseas, or recently become independent, everyone has to start from somewhere.

If you have no credit history whatsoever, there is still a way forward. Starting from this position does make the road more challenging, but there are multiple options available. Let’s take a look at credit scores in the United States and review the impact of credit on your lending opportunities. When you understand the basic tenets of the credit landscape, you can make smart choices about your future and look for viable alternatives to get the car of your dreams.

What is a credit score?

In the United States, your credit score is a number assigned to you by one or more recognized credit bureaus. This simple numerical expression is based on a detailed analysis of your credit files in order to represent your creditworthiness at any particular time. Your score is based on your credit history, which is based on your open accounts, total amount of debt, and repayment history, among other factors.

Your credit score is a number between 300 and 850, with higher scores likely to lead to more lending options:

  • Excellent credit: 800-850
  • Very good credit: 740-799
  • Good credit: 670-739
  • Fair credit: 580-669
  • Poor credit: 300-579

While people talk about one credit score, there are multiple scores available based on individual credit reports created by different credit bureaus. The most popular credit score model was created by the Fair Isaac Corporation (FICO), which compiles data from multiple sources. FICO has a competitor in VantageScore, which uses data from three major credit reporting agencies: Experian, Equifax, and Transunion.

Why your credit history matters

When banks and other lenders decide whether to lend you money, your credit score is very influential in their decision. While they will also look at many other factors, including your income, debt levels, and deposit, they are primarily interested in your ability to pay back the loan in the designated time period. In the modern financial world where personal relationships don’t mean much, your credit history is a measure of how much you can be trusted with money lent to you.

How to check your credit score

Credit scores are developed slowly over time, which gives lenders a reasonably accurate overview of your long-term financial situation. When it comes to borrowing money, lenders don’t want to make decisions based on your current circumstances alone – they also want to review your history as a borrower. If you don’t know what your score is, you can check your credit report at AnnualCreditReport.com. Additionally, separate scores are available from each of the three reporting agencies.

No credit vs. bad credit

Having no credit is very different from having bad credit. If you’re just starting your financial life for any reason, you are said to have a “thin credit file.” Instead of a compromised score, this simply means that lenders don’t know how much money you can be trusted with. In contrast, a bad credit score means you have a history of borrowing and have faced difficulties along the way.

People have no credit history for multiple reasons, which is one of the challenges you will need to overcome. You might be young and just starting out in life. Perhaps you’re a recent immigrant to the United States or a newly independent person separated from a partnership. If you don’t have a credit card or haven’t ever borrowed money from a bank or mainstream financial institution, you may have absolutely no credit history.

According to Consumer Financial Protection Bureau (CFPB) research, 45 million Americans are known to be “credit invisible.” This describes people with shallow financial records or no credit records whatsoever. Credit invisible people don’t have a credit score with FICO or any of the three major credit bureaus. According to this worrying study, there are “credit deserts” all over the country, with this term used to describe neighborhoods where people lack access to mainstream borrowing opportunities.

Options for people with no credit history

If you have no credit history whatsoever, you may face difficulties accessing credit. However, while buying a home can prove extremely challenging, less expensive items like cars are very much possible. While you might have to think outside the box, there are loans out there and lenders willing to help.

From negotiations and cash sales to cosigners and community lenders, let’s look at the options available to people with no credit history:

Negotiate a better deal

It’s important to remember this – your ability to access credit is always based on the value of the loan. While this might seem obvious, one of the best ways to get the car of your dreams is to negotiate a better deal. Whether you’re making a private deal or buying from a commercial car yard, the art of negotiation is alive and well when buying and selling automobiles. Both the sticker price and the trade-in value may be up for negotiation, with a lower overall price making it much easier for you to access credit.

Improve your down payment

Along with lowering the price of the car, you can improve your chances of getting a loan by increasing the amount of your down payment. While this is not always possible, making a large down payment shows that you are serious about the deal. If you have a compromised credit history or no history whatsoever, remaining patient and saving for longer often makes sense. From a lender’s perspective, it’s simple – a significant down payment shows that you’re a safer bet to repay the loan.

Pay cash for the car

If you’re in a position to pay cash for a new car, you can avoid borrowing any money at all. Once again, this is not always possible, but it’s a great option to have. If you don’t think you fit into this category, you may be wrong. Perhaps you can purchase a cheaper car in order to make a cash sale possible. Maybe you can borrow money from friends or family members to get on the open road sooner. Paying cash is not just a good way to avoid the impacts of a non-existent credit score – it’s also a great way to save money on interest over the term of the loan.

Get a cosigner

If friends and family are unable to lend you cash, or you don’t want to ask, they can still play a role in you getting a car loan. Having a cosigner is a great way to reassure lenders. In fact, this is the ideal way to circumvent the entire credit history checking process because another person takes responsibility for your loan. While you are still required to make loan payments, the cosigner is on the hook if the payments stop coming through. Depending on the loan, the cosigner may also be responsible for late fees and collection costs, along with surrounding legal obligations.

While a cosigned loan will affect both of your credit reports and can help you to build credit history over time, the other person’s credit score takes precedence when it comes to approving the loan. The other person’s score is not the only factor analyzed by lenders, however, with their job and debt to income (DTI) ratio likely to be checked before an application is approved. Before going down this path, it’s important to consider the long-term implications of a cosigner arrangement, including potential financial and relationship challenges.

Take advantage of alternative credit data

As mentioned above, there are multiple credit records available in the United States. If your standard FICO score is non-existent or compromised in any way, you may be able to use alternative records to get accepted for a car loan. When traditional proof is unavailable, some lenders are willing to look at non-traditional sources. While similar credit scoring formulas are still used, there are multiple options on the table.

In an effort to improve credit options for low-income people, FICO recently introduced the UltraFICO score, which is based primarily on your banking activity. Experion created another alternative with Experian Boost, which takes things like your cellphone and utility payments into consideration. While not all lenders are willing to use these records, community-based credit unions and other non-bank institutions are often more flexible in their approach.

Find the right lender for your situation

When you’re trying to buy a car with no credit history, it’s important to find the right lender for your unique financial situation. There are lots of options out there, from commercial car vendors to mainstream banks and credit unions, and community-based financial cooperatives:

  • Commercial car vendors – Commercial car yards often have finance options, but they are limited and can be extremely expensive and risky. Sometimes known as “buy here, pay here” deals, these loans are generally aimed at people with bad credit or no credit history. While these in-house loans may seem enticing, sky-high interest rates and significant ongoing fees are very common.
  • Mainstream banks and credit unions – Traditional banks and credit unions can be great places to obtain finance, but they’re often compromised when it comes to flexibility. If you have no credit history, you may be unlikely to meet their strict requirements. While a cosigner can be used in many situations, as mentioned, there are drawbacks associated with this path.
  • Community-based financial cooperatives – Small credit unions and community banks are more flexible and often more lenient when it comes to loan approval. Some lenders even have specific programs for people with no credit history, and others are much more willing to look past your credit score. While they still need to check you out, things like employment history, banking records, and utility payments can be used to check your creditworthiness.

Practical steps involved with getting a new car

Once you have a solid grasp of credit scores and how they affect your lending options, it’s important to take some practical steps toward car ownership. The following checklist is a great place to start:

  • Determine how much you can afford.
  • Check your credit history.
  • Save for a 20% deposit or more.
  • Consider family and friends as a cosigner.
  • Compare potential lenders.
  • Gain pre-approval before you shop.
  • Shop around for the best deal.
  • Apply for a car loan.

The DCCU difference

If you’re looking to get a car loan but don’t have any credit history, DCCU is here to help. We offer fair car loan arrangements that are highly competitive with the major banks. Unlike unscrupulous car vendors, our entire service is based around your needs. As a community-based institution, we are 100% committed to the economic and social well-being of our members. Our service is based on honest advice, low fees, and great rates.

We help people from a range of socioeconomic backgrounds to access car loans and other lending products. DCCU is owned by our members, and our financial cooperative is dedicated to “building lifetime relationships through personalized financial service.” Along with easy loan access and great deals, we provide a number of extras for car loans, including extended warranty protections and simple loan pre-approval. This can be a great negotiating tool, with price certainty leading to more confidence, better decision-making, and more competitive deals.

At DCCU, our values are strong and our message is clear: We are “a local neighborhood Madison credit union that stands for you.” Along with car loans, we offer a number of other lending services across Madison and surrounding counties. If you have no credit history and would like to get a car loan, please contact DCCU today to learn more about our services.

 

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Published by

Jen M.

Jen has been with DCCU since she graduated from UW Madison - a long time ago. As the Content Strategist she helps share all the amazing things DCCU does in our community and spreads the credit union philosophy of People Helping People. When she's not working for the best credit union in south central Wisconsin, she's busy with 4 kids and a feisty little dog at home. She formed her family through adoption and has a deep passion to support foster and adoptive parents and kids. Her favorite place to relax is poolside or in front of the fireplace.