Freedom. Independence. Convenience. Responsibility. Owning a vehicle means different things to different people, but it's always an exciting prospect when shopping for a new one. However, the process of applying for vehicle financing isn't as much fun—especially when you have no credit history.
Buying a car with no credit isn't easy, but it is possible. Fortunately, there are several ways you can increase your chances of approval, including getting pre-approved, enlisting a co-signer, making a large down payment, opting for dealer financing, leveraging alternative data, and more.
In addition, there are auto lenders who specialize in working with consumers who don't have an established credit history. So, if you're in the market for a vehicle but have little to no credit, stick around as we explore your options for financing a new or used set of wheels.
Before we dive into the most effective strategies, though, let's take a deeper look at the key question here.
Can You Finance a Car with No Credit?
The whole purpose of having a credit history is so that lenders can see you've previously borrowed money and diligently paid it back on time. No credit history; no credit score.
However, it's crucial to note that having no credit is not the same as having bad credit.
If you've never borrowed money or acquired a credit card, you have what's known as a "thin credit file." This simply means you don't have enough data to earn a score from any of the three major credit bureaus, namely Equifax, Experian, and TransUnion. You're not alone, though. There are nearly 45 million "credit invisible" adults in the U.S. today, according to a report by the Consumer Financial Protection Bureau's Office of Research.
Having bad credit, on the other hand, means you do have a history of borrowing funds but have made mistakes that have lowered your credit score. In both no credit and bad credit cases, it's possible to buy a car, but the process is slightly more complicated. It's also more expensive since lenders are likely to attach a higher interest rate and stricter lending terms to the deal.
To ensure buying a car won't seriously hurt your bank balance, we've put together a list of tips you can use to get vehicle finance approval while obtaining the most favorable terms. These tips can work for both no credit and bad credit borrowers.
How to Acquire No Credit Car Finance
Previously, we wrote about the minimum credit score needed to buy a car. Ideally, the strategy you'll want to focus on first is building your credit score. If you can't hold off on purchasing a vehicle for that long, the following tips can help ease the auto loan approval process.
1. Know How Much You Can Afford
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One of the biggest mistakes people make when purchasing a vehicle is overestimating what they can realistically afford. This is partly because they fail to factor in things like car insurance, maintenance, property tax, fuel, parking, and other expenses that tend to go along with vehicle ownership.
Determining affordability beforehand not only allows you to refine your search for finding an appropriate car but also helps you narrow down your financing options. In addition, it reduces your risk of going "underwater" or "upside-down" on your loan, meaning the market value of your car is less than what you still owe.
2. Save for a Large Down Payment
Having no credit will limit how much you can borrow. A high-interest rate will make that amount even lower. One way to get around this issue and show lenders that you're serious is to make a substantial down payment.
Saving a sizeable sum that can go toward the purchase of your car can help you qualify for loans faster, get better interest rates and loan terms, and lower your monthly installment. It can also widen your selection of vehicle options, as well as offset fees, taxes, and other related costs.
Most finance experts agree that buyers should have at least 20% down payment for a new vehicle and 10% down payment for a used one. This is because new cars depreciate by an estimated 20% in the first year, while pre-owned vehicles don't devalue as quickly.
Keep in mind that if you have a trade-in, you can apply its value to the down payment needed. What you don't want to do is tap sources like savings and your emergency fund for your down payment amount.
3. Get Pre-Approved
Getting a better understanding of how much money lenders would be willing to extend to you allows you to shop more realistically for vehicles in your price range. In addition, you may be able to use your pre-approval to negotiate a better purchase price, interest rate, and loan term—even with no credit.
In more good news, inquiries for pre-approval won't affect your credit score unless you choose to follow through and apply for the offer. Consider asking your bank or credit union first. If you can't get pre-approved through them, ask a dealership to put you in contact with lenders who cater to buyers with little to no credit history or bad credit.
4. Apply for Funding Through Your Community Bank or Credit Union
Community banks and credit unions tend to take a more personal approach to the loan process. Many will offer financing programs for first-time buyers, such as credit-builder auto loans, which are perfectly designed for people with no credit or a thin credit profile. They're also more willing to work with bad credit applicants who have faced financial difficulties.
Instead of feeding numbers into algorithms to determine your financial viability for a loan, these institutions use manual underwriting to assess applicants on a case-by-case basis. This simply means that they'll assign someone to sift through your financial records by hand. Typically, they'll review your job stability, pay stubs, your payment history for monthly bills, and the reasons you don't have credit.
Although you'll need to be a member of the bank or credit union you apply through, the upside is that getting approved by your own institution rather than a dealership can save you on both the markup the dealer would charge for a loan and the interest. If you're not currently a member, check for location-based credit unions in your area or investigate whether you're eligible to join through a family member or employer.
5. Consider Dealer Financing
For the sake of convenience sake, you can apply for an auto loan directly through your car dealership. However, there are some red flags you'll want to look out for when taking this approach.
Generally, dealer financing comes in two forms. Most commonly, a dealer will submit your finance application to different third-party lenders who specialize in no credit applicants. They'll then negotiate financing on your behalf. However, you'll want to watch out for unspecified interest rates, terms that are likely to exceed the life of the vehicle (especially in the case of used cars), and add-ons like loan insurance and life insurance.
The second type is "buy here, pay here" financing, which you'll want to avoid at all costs. In this case, the dealer offers a loan in-house to consumers who have bad credit or no credit. They have less stringent qualifying criteria and sometimes won't do a credit check. This may sound fantastic, but the problem is that they tend to attach sky-high interest rates in exchange for these services.
As long as you're careful and everything is clear upfront in terms of expectations, dealer financing can be an effective method of acquiring a car loan.
6. Get Someone to Cosign for You
One way to seem less risky to lenders is to get a cosigner, such as a family member or friend, with established credit history involved. Lenders are more likely to favor you as an applicant because they view it as two people taking on responsibility for the debt. Therefore, lenders can simply claim the money from your cosigner if you default.
If you can find someone willing to stand surety for you, make certain you create a rock-solid agreement between the two of you before applying for a loan. If you miss a payment or the deal goes bad, it can negatively impact the credit scores of both you and your cosigner.
7. Leverage Alternative Credit Information
Existing lines of credit and a great credit score aren't the only ways to prove you're a reliable borrower. If you have a checking account, rent payment, utility bill, cellphone, or streaming service, you can use this untraditional credit data to show that you responsibly pay your bills every month.
Fortunately, credit bureaus are now making it easier than ever to submit this kind of information so that it forms part of your credit score calculations. Experian Boost, for example, is just one of many online tools that enable alternative data reporting.
Keep reading: Car Down Payment On Credit Card
Auto lenders typically favor reliable applicants with an established pattern of responsible borrowing and consistent, punctual payments. While you may face more challenges and greater limitations than someone with a solid credit score, having no credit history doesn't count you out entirely. The tips discussed above will put you on the right track for a successful car buying journey, no matter your credit score.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.