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Updated on Tuesday, February 26, 2019
If you have no credit but are in need of a car, you may be wondering whether you can get a car loan. But the good news is that while securing a car loan with no credit can be tricky, it is certainly possible. Here’s what you need to know.
Credit and getting a car loan
“Your credit history is a reflection of your financial character. It reveals how responsible you are and can tell a lender how likely you are to pay them back,” said Trudy Finlayson, a loan officer and certified financial and family wellness educator at House of Loans in Claremont, Calif.
FICO auto scores are often used by lenders to evaluate applicants and determine interest rates and terms for auto loans. To figure out your FICO auto score, FICO will calculate your base FICO score, which may range from 300 to 850. Don’t know yours? Here’s how to view your free FICO score.
Lenders look at factors that may signify a potential auto loan default such as short credit history, signs of having gone through credit repair, previous late payments on auto loans and previous repossession from an auto loan. Once these factors are considered, you’ll receive a FICO auto score that ranges from 250 to 900.
Since lenders may use your FICO auto credit score to determine the rate you’ll get on a car loan or whether you are eligible for a car loan at all, your credit history is important if you’re in the market for a new car.
Why some consumers have no credit
According to a 2016 report by the Consumer Financial Protection Bureau, nearly one in five consumers have no credit history or credit score. FICO, along with credit bureaus like Experian, have more recently begun to talk about ways to help the 3 billion people worldwide who are “unbanked” or “underbanked.”
“A lack of knowledge is the main reason many consumers don’t have a credit score. They are simply unaware of its importance and never had a parent or mentor encourage them to build a good credit history,” said Finlayson.
Many of these consumers with no credit are recent college graduates or other young individuals who haven’t put any effort into establishing a solid credit history. They may also have a cash-only mindset that has deterred them from applying for credit.
No credit versus bad credit. Consumers with no credit simply never applied for credit, whereas those with poor credit didn’t make their payments on time, failed to make their payments at all, spent more than they could afford on their credit cards and/or faced a bankruptcy or foreclosure.
How to get a car loan with no credit
By following these tips, you may be able to get a car loan with no credit history.
Save for a down payment
“A down payment lowers your risk assessment and can significantly increase your chances of getting approved for a car loan,” said Finlayson. With a down payment, you can also secure a more favorable interest rate, which can save you hundreds or even thousands of dollars over the course of your loan.
Get a co-signer
Finlayson recommended asking a family member or close friend that you trust to co-sign your car loan, as they can help you lock down a better loan. As long as you are confident that you can stay on top of your loan and won’t hurt the co-signer’s financial reputation, getting a co-signer is a wise move.
“Obtain a secured credit card and pay it off every month so you can establish a good credit history and raise your chances of getting approved for a lower interest rate,” Finlayson suggested.
Perform your research
“By performing your research and shopping around for car loans, you can make an informed decision. Don’t act out of desperation,” explained Finlayson. Rather than getting caught up in the moment and excitement of buying a new car, it’s important to get several quotes for car loans before even stepping foot into a dealership.
Negotiate the price of a car before revealing your credit history
The truth is that if you let a car salesman know you have no credit, they may increase the price of the car. Finlayson recommends negotiating the price of a car before informing the salesman of your credit history to avoid this situation.
Beware of “buy here, pay here” dealerships
“Buy here, pay here” dealerships offer in-house auto financing to customers who have no or poor credit history. Their APRs are typically far higher than banks or credit union loans. Many of these dealers often require monthly, or sometimes weekly, in-person payments.
Search for the ideal financing option
It’s important to understand that there are reputable companies that are willing to extend car loans to borrowers with no credit or poor credit. Consider searching for financing at credit unions like Visions Federal Credit Union or Marine Credit Union, as their requirements are typically more lenient than banks.