People who haven't yet established a credit history may consider getting auto loans by applying with co-signers who have good or excellent credit. Making a large down payment might also work. Alternatively, you could even look for loans designed for borrowers with no credit histories, although these tend to come with higher-than-usual interest rates.
Your credit score impacts the auto loans you may qualify for as well as the interest rate you get.
Most providers of conventional auto loans favor applicants with good or excellent credit scores (670 or higher).
Some banks, car dealerships and online lenders provide auto loans to people without credit histories.
Can You Get an Auto Loan With No Credit History?
While getting an auto loan with no credit history is possible, the process is usually more challenging than it would be if you had good or excellent credit. Besides, qualifying for a conventional auto loan with no credit history is very difficult because providers of such loans would view you as a high-risk borrower. People with no credit history have limited options and typically pay high interest rates.
Getting a co-signer with good creditworthiness to apply with you is one way to qualify for a regular auto loan. However, the co-signer becomes liable to pay the loan if you default, so finding one might not be easy. Another option is to apply for a no-credit auto loan.
Remember that having no credit history is better than having a poor credit score because the latter indicates that you’ve been irresponsible in handling your finances. In addition, repairing poor credit usually takes more time and effort than building it from scratch.
What Is Creditworthiness and Why Does It Matter?
Creditworthiness refers to how much risk a borrower poses to a lender when seeking credit. For example, an auto loan provider would consider you creditworthy if it is willing to grant you a loan. Your credit score is a direct indicator of your creditworthiness. While a high credit score means you have good creditworthiness, the converse holds true as well.
- Creditworthiness: Your ability to qualify for credit.
- Credit report: Includes details about outstanding balances, credit limits, payments, late/missed payments, past-due amounts and bankruptcies.
- Credit score: A numerical representation of your creditworthiness based on your credit report.
Factors that affect your credit score include your payment history, your credit utilization ratio, the average age of your credit accounts, how often you apply for new credit and your credit mix. Your credit utilization ratio refers to the amount of credit you’ve used from your total available credit.
When you apply for an auto loan, a lender will look at your credit score to determine how creditworthy you are to make a decision. Your credit score also plays a role in the interest rate you get because people with excellent credit scores tend to qualify for the lowest rates. People with no credit history, on the other hand, typically have to make do with loans that come with high interest rates.
What Does Having No Credit History Mean?
Having no credit history means credit bureaus have not received information about any of your bill payments yet. It also means you’ve not taken out a loan or gotten a credit card or another credit-related product yet because most lenders report credit-related information to credit bureaus. The absence of a credit history does not imply you are irresponsible with your finances. It highlights that you’ve not used credit and, therefore, have no credit score.
Bear in mind, though, that it’s possible to have a credit score without using any credit-related product. This is by getting your rent, utility, phone and other payments reflected on your credit reports.
Having bad credit indicates you’ve had trouble managing your debt. Some of the most common reasons for bad creditworthiness include late payments, accounts in collection, charge-offs, defaults and poor credit utilization ratios.
Auto loan providers view applicants with poor credit scores as higher-risk borrowers than those with no credit history. This is because the former have already faced documented challenges in keeping up with their finances.
Data released by Experian shows that around 66% of the car loans issued in the U.S. go to people who have credit scores of 661 or higher. Around 14% go to borrowers with scores of 501 to 600, whereas those with scores of 500 and lower account for just 1%. While a low credit score does not restrict you from getting an auto loan, it minimizes your options, and you will likely need to pay a high interest rate.
Given that your credit score plays a key role in your ability to get an auto loan as well as the interest rate, it’s recommended that you know where it stands ahead of time. Fortunately, it’s easy to check your credit score online for free by using different web portals.
Where to Get an Auto Loan With No Credit History
If you're looking for a no-credit auto loan, you can choose from online lenders, car dealers that offer to finance, some banks and credit unions.
If you're looking for quick processing of your auto loan application, an online lender might be the way to go. Some online lenders provide pre-approval. However, it's important to closely examine the terms and conditions before accepting any offer.
Several car dealers provide financing solutions for their customers by partnering with one or more financial institutions, be it banks or credit unions. Upon your application's approval, you make monthly payments directly to the lender. In some instances, dealers may add markups on interest rates, which would make your loan more expensive.
Banks or credit unions
If you have a longstanding banking relationship with a bank or a credit union, you might want to check to see if it's willing to provide you with an auto loan. You might qualify for a competitive interest rate based on how good a customer you've been.
Getting an Auto Loan With No Credit
If you're wondering how to apply for an auto loan with no credit, bear in mind that the process begins before the application. But following a streamlined approach increases the likelihood of approval.
Calculate what you can afford
Affordability requires your attention because you'll need to keep making monthly payments until you pay off the loan completely. If you burden yourself with high monthly payments and can't keep up with them, you risk the lender taking possession of the car. Using MoneyGeek's auto loan calculator can give you an idea of how much you might need to pay each month based on different loan amounts and other factors.
Evaluate your creditworthiness
It's a good idea to check if you have a credit score even if you've never used any form of credit. It may be that some of your bill payments have been reported to credit bureaus. Or you may discover you've been a victim of identity theft. In any case, it's best to know where you stand before a lender processing your application does.
Select a no-credit lender
Given that there are multiple no-credit lenders to choose from, it's important to compare your options based on factors such as interest rates, fees, flexibility in terms and customer service.
Consider getting a co-signer
If you wish to avoid getting a high-interest no-credit auto loan, consider applying for a conventional one with a co-signer who has good or excellent creditworthiness. In this case, your co-signer's credit score might help you get a loan with a low interest rate.
Make a large down payment
The bigger your down payment, the less money you need from a lender. While this does not guarantee qualifying for an auto loan, you can usually expect a lender to view your application favorably because the large down payment amount reduces the lender's risk and demonstrates that you also have skin in the game.
How to Build a Solid Credit History
Building a good credit score requires that you handle all the credit made available to you responsibly. Bear in mind that building credit does not happen overnight. It takes perseverance and patience. But you may start seeing signs of improvement in as little as six months.
- Get a credit card: Getting a credit card may help you build your credit score. Some credit card issuers provide cards for people with no credit histories by taking other factors into account. You may also consider getting a secured card by providing a security deposit, as these are typically easier to qualify for than unsecured cards. However, make sure you get a card whose issuer reports account activity to credit bureaus.
- Get a credit-builder loan: As the name implies, these loans allow you to build credit. With a credit-builder loan, you make monthly payments to the loan provider for a predetermined period, only after which you get access to the loan amount.
- Report other payments to credit bureaus: People with no credit histories may consider getting started by using Experian Boost. This free online service helps you build your credit score by offering credit for your payments toward rent, utilities and popular streaming services.
- Make payments on time: If you have a credit card or have taken out any type of loan, it's important to make all your monthly payments on time. While timely payments help build your credit score, a late or missed payment may cause considerable damage.
- Keep your credit utilization ratio low: Your credit utilization ratio measures the amount you owe compared to the total credit made available to you. For example, if you have just one credit card with a credit limit of $1,000, of which you've used $500, your credit utilization ratio is 50%. From the credit score point of view, this number should be below 30%.
- Limit the number of applications for new credit: Your credit score drops by a few points every time you apply for any new form of credit. As a result, it's ideal that you space out applications for new credit by at least six months.
- Add to the mix: Adding to your credit mix plays a role in improving your credit score. While a credit card works as a revolving form of credit, you may consider getting an installment account in the form of a personal loan to add to the mix. Getting an auto loan would also have a similar effect.
Alternatives to Consider
If you're unable to get an auto loan to buy a car, there are a few other options you might explore.
- Ask a relative/friend for money: Since financial matters can be a source of tension and strife, it's best to tread lightly down this path. Ideally, put details of the agreement on paper and have a repayment schedule set up in advance.
- Use public transportation: If you've used public transportation until now, consider using it for a little longer. That could give you time to build your credit score and save for a larger down payment.
- Look for a more affordable vehicle: If you are set on buying a new car, consider getting a used one instead. Alternatively, look for a vehicle that's easier on your wallet.
FAQs on Getting an Auto Loan With No Credit History
Take a look at other commonly asked questions about how to get an auto loan with no credit history to determine if you might qualify for one.
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- Experian. "State of the Automotive Finance Market Q3 2022." Accessed February 13, 2022.
- Experian. "Experian Boost." Accessed February 13, 2022.
- Experian. "How Long Does It Take to Build Credit?." Accessed February 13, 2022.
- Experian. "What Credit Score Does a Cosigner Need?." Accessed February 14, 2022.