Individuals who haven't yet begun to build a credit history may have a hard time securing auto loan financing. This is because lenders do not yet have a way to gauge how safe or risky it is to lend to these individuals. This article discusses both how to build a positive credit history and how to secure an auto loan even if your credit history remains either non-existent or poor.
Written by Ashley Fischer, J.D..
Updated November 30, 2021
When it comes to credit, we all start with a blank slate. It’s up to you to research credit opportunities and take steps to take to build your credit portfolio over time. One of those steps could be getting a car loan. But without an established credit history, this can be tricky. The good news is that it’s not impossible.
In this article, we’ll cover the difference between no credit and bad credit, what credit actually is, and your options for no credit car loans. Then we’ll give you seven credit-building tools you can use to get a car loan if you don’t have credit. Bonus: You can also use these tips if you have poor credit or negative items on your credit history.
No Credit ≠ Bad Credit
Not having a credit history isn’t the same thing as having bad credit. What’s the difference?
What It Means To Have No Credit
If you have no credit, it means you haven’t taken out credit cards or loans. This is most typically seen with younger people who haven’t had the opportunity to establish credit. But it may also apply to folks who are used to paying for everything with cash.
What It Means To Have Bad Credit
Having bad credit means you have had loans or credit cards, but you’ve made mistakes with them. These mistakes could include:
Making late payments
Maxing out your credit cards or using too much of your credit limit
Having accounts sent to collections
Having bad credit doesn’t mean you’re a bad person. Most likely, it means you hit a financial rough patch. This can happen with a job loss, illness, or any other unexpected life event. But since your repayment history is a big part of your credit score, if these events cause you to miss or fall behind on credit card or loan payments, they will damage your credit.
The good news is you can use credit-building tools to improve your score if you have bad credit or to build credit if you have no credit. Even though lenders view not having a credit history and having a poor credit history differently, both types of borrowers can use the same tools to improve their creditworthiness.
A Bad History Is Better Than No Credit History at All
If you don’t have credit and you want to get a car loan, it can be challenging. That’s because lenders look at your credit history and credit score to see how reliable or risky of a borrower you’ll be. It helps them decide whether to approve you for the car loan and what interest rate to give you. If you have no credit, lenders will be wary of lending you money and will view you as a high-risk borrower.
Lenders essentially make a bet on you whether you’ll make your monthly payments or end up defaulting on your loan. If they decide to take a risk on you, they will offer you a loan with a high interest rate. They may also require a larger down payment as part of the loan terms.
Credit Score vs. Credit History
In addition to your credit history, the lender will look at your credit score. This is a quick snapshot of your creditworthiness. There are three major credit bureaus — Experian, TransUnion, and Equifax — that use the items in your credit report to calculate your credit score.
Your credit score is calculated from five factors:
Your payment history, including on-time and late payments, makes up 35% of your score.
Your credit utilization ratio, which is how much of your total available credit you’re using, makes up another 30% of your score. Aim to use 30% or less to keep yourself in good standing.
The length of your credit history, which is how long your accounts have been open, makes up 15% of your score.
New credit inquiries make up 10% of your score.
The variety and balance of your credit accounts help demonstrate you know how to use different types of credit. This makes up 10% of your score.
When you have a solid history, you’ll have a higher credit score. This means lenders are more likely to approve you for loans and give you a good interest rate. If you’ve had issues making payments on time, you’re using too much of your credit, you don’t have a long credit history, or you don’t have different types of accounts (a mix of credit cards and installments loans), you’ll have a lower credit score and may only be offered higher interest auto loans or credit cards. But if you keep up with timely payments, your score will increase and your creditworthiness will help you access better interest rates and higher credit limits in the future.
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No Credit Car Loan Options Exist!
Taking out an auto loan is a great way to start establishing your credit. But how can you get a loan if you don’t have any credit? You have options!
Some lenders specialize in loans for people with no credit or bad credit. They may offer special programs directly through dealerships or financial institutions like credit unions and small community banks.
Local financial institutions like credit unions and community banks often provide loans for people with no credit or bad credit as well.
Some dealerships offer “buy here, pay here” programs, which give no credit check loans. These are most common with used cars, but some new car dealers offer in-house financing options on certain vehicles. These loans, called subprime auto loans, often come with high interest rates because they don’t require a credit check.
To get approved for a subprime auto loan, you’ll need to provide a lot of financial information. This might include pay stubs and/or tax documents to verify your income and bank statements. Although each lender has different eligibility requirements, at a minimum, you’ll have to show proof of income or employment and proof of residence.
Things To Keep in Mind When Shopping for a Car Loan
If you’re a first-time borrower looking for auto financing, take time to look at several loan options. Different lenders will offer you loans with different terms, including how much you can borrow, what interest rate you’ll pay, and how long you’ll have to pay back the loan.
Verify that whatever lender you choose to get auto financing from is going to report your loan payments to the credit bureaus. This is common for lenders like banks and credit unions, but some buy here, pay here dealers don’t report on-time payments to the credit bureaus. It’s important to find a lender that reports your payments so you can start to build your credit history.
Be aware that you may be required to provide a larger down payment to reduce the loan amount and the lender’s risk. You may also need someone who has a good credit score to co-sign the loan to get approved. A co-signer agrees to take over your payments if you’re unable to pay. Having someone co-sign decreases the lender's risk and makes it easier to get approved or get better loan terms.
If you aren’t able to get a loan with very good terms, keep in mind that you may be able to refinance your car loan later to get a lower interest rate. For this to happen, you’ll need to make your loan payments on time and keep working to build and improve your credit.
How To Build Your Credit To Get a Car Loan
The best way to prepare yourself to get a car loan is to begin building your credit file. There are many ways to do this, and what works for one person may not work for another. One important thing to remember is that you can’t build credit overnight. But with consistent effort, you’ll be able to build or improve your credit score over time.
Here are seven tested tips that will help you begin establishing your credit identity:
Report nontraditional monthly payments. You can build your credit history by using programs like Experian Boost to report nontraditional payments like your phone bill, utility bill, and streaming services. The program does all the work for you by monitoring your payments when you link your bank account. Take note, though, that this information will only be reported to the credit bureaus offering the program. Experian Boost, for example, only reports payment information to Experian, not the other credit bureaus.
Take out a secured credit card. Traditional credit cards are unsecured, meaning there’s nothing backing them up if you don’t pay. This is why they often have high interest rates. You can use a secured credit card just like a regular credit card, but it’s easier to get because you deposit the entire amount you’re approved for upfront. As you pay off the card, you build your credit.
Ask your landlord to report your rent payments to the credit bureaus. Your landlord or property manager may already do this, but if they don't, ask if they’ll start. Any on-time payments that are reported will help build your credit.
Ask to be an authorized user on someone’s account. Becoming an authorized user allows you to benefit from someone else’s good credit by becoming a user on their account. To benefit, you don’t have to make payments or even use the person’s credit card.
Pay down debt. If you already have credit cards, make sure not to max them out. Make more than the minimum payment each month, and do your best to use 30% or less of your available credit to keep your credit utilization ratio low. Good money management will help!
Take out a credit-builder loan. Some local and regional banks offer credit builder loans, which help you build your credit while building your savings.
Start using a revolving credit account. A revolving credit account allows you to establish your creditworthiness with a set spending limit that you pay off in full each month.
These tips will help you establish credit before you begin the car buying process. This can help you qualify for a better car loan. Once your auto loan is approved, you can continue building your credit by making on-time payments. It’s essential to do this not only to build your credit but to avoid having your car repossessed, which the lender can do if you don’t pay.
Having no credit is different from having bad credit. You may not have a credit history or credit score if you haven’t taken out any loans or credit cards. It can be harder to get approved for loans like an auto loan if you don’t have a credit history because lenders look at your history to see how reliable you’ll be as a borrower. That said, some lenders specialize in loans for people with no credit or bad credit. Check around with local car dealers and community banks and credit unions.
You may want to work on building your credit prior to getting an auto loan to increase your chances of getting approved for the loan and getting good loan terms like a low interest rate. There are many steps you can take to do this. If you need the loan now, see if you can get someone you trust who has good credit to co-sign the loan for you.