How to Get a Car Loan if You Don’t Have Credit History

Let’s face it: cars are expensive. Unfortunately, not everyone has enough money to purchase a vehicle in cash, so we usually need to take out a car loan. But what if you do not have a credit history — meaning, you don’t own a credit card and haven’t borrowed money from the bank before? Now, how to get a car loan with no credit?

What is a car loan?

Let’s start by defining what a car loan is. Also known as an automobile loan or auto loan, a car loan is a sum of money that a bank lends a borrower for the latter to purchase a vehicle. A borrower agrees to pay the total amount of the loan, usually in monthly installments, plus any interest. 

Car loans follow the procedures and rules as other types of loans. Typically, a borrower explicitly takes out a car loan when purchasing a vehicle. However, borrowers can also use personal loans at their discretion. Payment terms usually last between 24 and 60 months, although some loans can go for more extended periods.

What does credit history have to do with a car loan? 

Your credit history and credit score affect your ability to take out a car loan, the terms you may be offered, and the interest you will pay. However, when you submit a loan application, lenders take reasonable steps to make sure that you can repay the loan on time. And credit history is a good measure of this. 

Borrowers with good credit are deemed unlikely to default on a loan, and they are also typically offered reasonable APRs (annual percentage rate) or lower interest rates. Conversely, if you have a low credit score, your loan is more expensive for you down the road with the higher interest and monthly payments. 

If you apply for a loan without credit, lenders will find it difficult to gauge whether you’re a good borrower or not. It’s pretty much a Catch-22 since you can’t get credit because you don’t have one. But the good news is that financial institutions are willing to work with borrowers who have no credit history at the time of borrowing.

How do you get a car loan if you don’t have a credit history?

A strong credit history increases your chances of getting a car loan. However, there are ways to purchase a car via an auto loan, even without a credit history. Here are a few of them:

Walk-in with a co-signer

Getting a co-signer is borrowing money using someone else’s credit history. Having a co-signer with good credit standing can make you seem more trustworthy, increasing your chances of getting a loan. The co-signer agrees to take responsibility for payments if you default on your loan. If you are taking this track, make sure that you make your payments on time. Otherwise, these late payments or misses will go permanently on your co-signer’s credit history. 

Get dealership financing

This can go in two ways. The first and the most typical is the car dealer taking your application, submitting them to different lenders, negotiating with them for you, then offering you a loan via a third party lender. 

The second is in-house financing, typically offered by “buy here, pay here” dealerships. They offer auto loans that have higher interest rates than traditional car loans. Since they don’t do credit checks, they are typically interested in your consistent income from employment, pension, spousal support, or Social Security Disability Income. Unfortunately, many “buy here, pay here” dealerships do not report your payments to credit bureaus. So, it’s best to ask if they report positive payment history to the three major credit bureaus, TransUnion, Experian, and Equifax. Good payment history will help you build good credit.

Go to credit unions and community banks

Credit unions and small community banks may be more accommodating to borrowers with no credit history than banks. You have to do due diligence in finding them. If you have a checking or savings account with your local community bank, ask their lending specialist if they offer loans to borrowers with bad or no credit. Some lenders have programs for first-time borrowers. And since they are not looking at your credit history, they will be interested in other criteria and factors, such as job stability, utility payments, and pay stubs, to name a few. 

If you’re a student, a recent graduate, or someone just starting to build their credit, your community bank may also offer special financing to you. For example, when you get a car loan, you may also want to pair it with a small credit card to get you started on credit-building as you repay your loan. Just make sure you make timely payments on both of them.

Other Tips

• Make a sizeable down payment. If you could save money for a downpayment, then better. Some lenders require borrowers without credit to make a downpayment as this reduces the risk by lowering the loan amount. This also benefits you as the borrower since you will be making smaller monthly payments and saving on interest.
• Build your credit first. If you have the luxury of time to wait, it’s best to build your credit score first before getting a car loan. You can get a credit-builder loan or a credit card to start. You can also be an authorized user on a family member’s credit card. These are just some of the most common credit-building strategies you can use.
• Refinance when your credit improves. If you make your payments on time, your credit score improves over time. When this happens, you can refinance or take out a new loan with lower interest rates to pay off the car loan you took before. 

It is not impossible to get a car loan if you don’t have a credit history. It may be more complicated than if you have good credit standing, but there are ways to help you start somewhere. 

It is also essential to find a trusted lender, especially one with structures that new borrowers can easily understand. The loan structures of Payment1 Financial are designed to make payments more manageable. Apply for a loan now or contact us for questions, today.