If you don’t have a credit history, you can still buy a car, but it will be more difficult. Without a credit history, it’s hard for lenders to know how risky you are as a borrower. You may be offered loans with higher interest rates. Some financial institutions specialize in giving loans to borrowers without a credit history, so it's worth shopping around.
Written by Attorney Eric Hansen.
Updated April 12, 2022
Buying a new or used car can be exhilarating and stressful, especially when you need to get auto financing to help pay for it. If you have an established credit history and a good credit score you’ll have an easier time getting financing than those with a bad credit history or no credit history. You may not have a credit history if you haven’t been a loan borrower before or you usually pay for things with cash.
Not having a credit history makes it harder for lenders to know how risky it is to give you money to buy a car. They can’t see whether you’ve paid your loans, credit cards, or other bills in the past, which is a good indication of whether you’ll be able to pay back an auto loan in the future. That said, we’ve all got to start somewhere, and some lenders will work with borrowers without a credit history. Read on to learn more.
No Credit vs. Bad Credit
Buying a car without credit is possible, but it isn’t easy. It’s sort of like buying a car with bad credit — not impossible, just trickier and with more limited financing options.
What does it mean to have no credit and no credit history? Well, it means that you haven’t established or had access to credit-building opportunities. In short, you don’t have credit cards, personal loans, installment plans, student loans, a mortgage loan, etc. Credit accounts give borrowers the opportunity to build their credit by making on-time payments each month to their lenders.
Most lenders report those timely monthly payments to the three major credit bureaus (Equifax, Experian, and TransUnion). This establishes a credit history in your credit report that shows that you’ve responsibly dealt with the money lenders have given you by ensuring consistent repayment.
Having no credit history is different from having a bad credit history or poor credit score. Bad credit usually means that the borrower has made mistakes, which got reported in their credit history. If you have bad credit, you’ve likely made late payments, missed payments, or been delinquent on your credit accounts. Too many missed payments can lead you to default on a loan. That can cause repossession, foreclosure, or other collection activity, which will appear on your credit reports.
Having negative items on your credit reports tells prospective lenders that it’s risky to lend to you. Lenders might not approve you for an auto loan if you have bad credit or they may approve you for a loan with a high interest rate or unfavorable loan terms. Again, if you have no credit that is not the same as having bad credit. But if you have no credit you might face some of the same difficulties that a person with bad credit faces when they are seeking auto financing to purchase a car.
Why Not Having a Credit History Is a Credit Risk
Auto lenders view borrowers with no credit history as risky and uncertain. The loan terms, interest rates, and loan lengths that lenders will offer borrowers with no credit will reflect the lender’s concern. Offering a loan at a higher interest rate helps lenders offset their perceived financial risk. Most lenders will check your FICO score and credit reports to assess this risk and whether you’re more likely to successfully pay back the loan or to fail to pay it back and default.
How Lenders Use Credit Scores
Your credit score is a good indicator of your creditworthiness as a borrower. A higher credit score usually means that you have a demonstrated history of using credit responsibly. You likely make on-time payments, keep your debt-to-income ratio low, and have a good mix of different kinds of credit.
Since a borrower with good credit is less likely to default on a loan, lenders will likely offer a good annual percentage rate (APR) or lower interest rate. Having a lower interest rate also means you have a lower monthly payment and the total cost of the loan is cheaper. On the flip side, a lower credit score generally means you’ll get a higher interest rate and higher monthly payment. This means the loan is more expensive for you in the long run.
If you complete a car loan application and you don’t have credit, it’s difficult for lenders to evaluate your creditworthiness and analyze the possible financial risk. Since you don’t have an established record of good credit usage, lenders can’t effectively gauge whether or not you’ll be able to pay off the loan. If you’re able to find an auto loan lender that is willing to work with you and you don’t have credit, you should expect to pay higher interest rates than someone with a good credit score and an established credit history.
This might seem like a Catch-22, and it kind of is: You can’t get credit because you don’t have credit. That said, some lenders are willing to work with new borrowers who don’t have a credit history and need to build one.
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Finding a Lender That Will Work With You
Everyone has to start somewhere. Lenders know this. Many lenders are willing to work with borrowers who don’t have any credit history. They may have financing programs that are specifically designed for people with bad credit or no credit. Other times car dealerships may partner with a network of lenders that offer financing to car buyers with no credit or bad credit.
Start With Your Bank or Credit Union
When you don’t have credit and you’re looking for a lender that will work with you, you may want to start with financial institutions that you already do business with. If you have a savings or checking account at a local credit union or a small community bank, speak with one of their lending specialists to see if they have loans for borrowers with bad credit or no credit.
These financial institutions may have special loan programs for students, recent school graduates, or people just getting started out in their credit building journey to help them purchase a car and establish a credit history. You may want to pair the auto loan with a small credit card. If you make full, timely payments to both lines of credit, you’re off to a good start building your credit with on-time payments and a good credit mix.
Cautiously Consider Buy-Here, Pay-Here Dealers
You’ve probably seen car dealerships that advertise auto financing to borrowers with bad credit scores or no credit history at all. These buy-here, pay-here dealerships don’t typically do a credit check. Instead, they’ll verify that you have stable, consistent income from employment, Social Security Disability Income, spousal support, a trust, or a pension. Typically buy-here, pay-here car dealers charge much higher interest rates than standard auto loans and they only have used car inventory.
See if You Qualify for In-House Financing at a Dealership
Alternatively, there are some new car dealerships that offer in-house financing similar to a buy-here, pay-here used car dealership but only on certain vehicles in the lot. Expect to pay higher interest rates and not have a wide selection to choose from. The loans may be for some of the less attractive and less popular car models at the dealership.
Remember to ask if your payments will be reported to the credit bureaus!
If you go with a buy-here, pay-here dealership or the in-house auto financing at a new car dealer, make sure that they will report your positive payment history to all three of the major credit bureaus (Experian, Equifax, and TransUnion). You’ll have to check and see if they actually report credit information as a lot of buy-here, pay-here dealers don’t. Making on-time payments regularly will serve you well and help build your credit, no matter whether you have a bad credit history or no credit history at all.
Whether you’re completing an auto loan application with a financial institution like a credit union or going through a dealership, you’ll need to provide proof of income and residence that is consistent and stable. Though each lender’s eligibility requirements will vary and you must meet them to be approved for auto financing, you’ll need to demonstrate to the lender that you aren’t a big credit risk. In lieu of a credit history check, your personal financial stability will help the lender assess their risk.
Tips for Getting a Car Loan
A lot of the best tips and tricks for getting a car loan when you have good credit also apply when you don’t have a credit history. You’ll want to shop around for a car loan. Each lender will have different eligibility requirements and shopping around will allow you to get and compare several different loan offers. Then you can select the best loan terms and the best interest rate you’re offered. You’ll need to prove that you have consistent income, either from employment or another stable income source. The lender needs to know that you’ll be able to comfortably pay back the loan.
Here are some other great tips:
Make a down payment.
If you’re able, make a down payment on a vehicle or increase the down payment you planned to make. Many lenders that provide auto financing to people without credit require a down payment. This helps decrease their risk by reducing the overall loan amount. It has benefits for you too. You’ll have to borrow less if you make or increase your down payment, which means you also save money on interest payments.
Get someone to cosign on the loan.
Sometimes it is a smart idea to get a cosigner on an auto loan. A cosigner should be financially responsible and have a good credit history. Note that any late payments, missed payments, delinquencies, defaults, and repossessions will be reflected on both the borrower’s and the cosigner’s credit file.
Delay your loan while you build your credit.
If you can wait a bit, you should consider taking steps to build your credit history before shopping around for auto financing. Getting a credit-builder loan, taking out a secured credit card, and/or becoming an authorized user on a friend or family member’s credit card are credit-building strategies that can help boost your score. If you put in the time and work to build up a positive credit history, you’ll be able to get better interest rates and better loan terms than before.
Use your loan to keep improving your credit.
After you get an auto loan, use it as a building block to continue establishing a positive credit history. Your loan terms on the current loan may not be the best, but if you’re able to make timely payments and pay off the loan, you’ll be able to get better financing options on your next car purchase. In some cases, you may be able to refinance an existing subprime loan to get a loan with better terms.
On the other hand, if you fall behind you risk repossession and collection activity on any past-due amounts. This will damage your credit file and hurt your chances of getting approved for other credit accounts. Be sure you can confidently and comfortably afford the car loan before you agree to anything.
It’s not impossible to get a car loan when you have no credit. But it’s more challenging than it would be if you had an established credit history and a good credit score. Since you don’t have a credit history, lenders will view you as risky and will likely offer you loans with higher interest rates and less desirable terms, if they approve you at all. That said, everyone has to start somewhere, and some lenders offer special loans for people without a credit history. Be sure to shop around for the best deal possible and use this as an opportunity to learn and build your credit.