How to Buy a Car with No Credit

buy a car with no credit

By Ben Luthi

Getting access to credit can be difficult if you don’t have a credit history, and car loans are no exception. If you’ve recently immigrated to the United States, are a college student, or you’ve simply never taken the time to build a credit history, buying a car isn’t impossible.

It may, however, require some extra research to ensure you get the best deal available — which, unfortunately, will still be more expensive than if you were to have an established, positive credit history. Here’s what you need to know.

How not having credit impacts the car-buying process

Unless you have the cash required to buy a car outright, you’ll need a loan to finance some or all of the sales price.

If you have no credit history, however, you may have a tough time convincing some lenders to extend credit. That’s because a person’s credit history, and the credit score that represents it, indicates how likely they are to pay their bills on time.

If you don’t have a credit history, lenders don’t have any past information to help them determine whether or not you’re a responsible borrower. For many lenders, that risk is too high, and they may deny your application.

There are, however, some auto lenders that specialize in working with people who have poor or no credit. While it’s possible to get approved for a loan through them, you can generally expect to pay a high interest rate on your loan until you can establish a good enough credit history to refinance the loan in the future.

Even if you do qualify, you may be limited to used cars for a while, primarily because new cars typically cost more and you may not qualify for a loan big enough to meet the sales price.

Finally, having bad credit could negatively impact your car insurance rates. In most states, auto insurers use what’s called a credit-based insurance score to help determine your rate. While it won’t necessarily increase your rate on its own, it could if there are other reasons, too. Either way, you could miss out on savings.

How to buy a car with no credit

If you’re looking for a car loan and want to avoid getting taken advantage of, there are a few things you can do. Here are some of the best options available for buying a car without credit.

Get a cosigner

If you have a creditworthy family member or friend who is willing to apply with you, you may be able to qualify for a car loan with even some traditional auto lenders that might otherwise brush you off.

That’s because a cosigner is also legally responsible for paying back the debt. So the lender knows that if you default, the other person on the loan is likelier to repay the debt to avoid wrecking their credit.

Shop around

It’s important to shop around and compare any financial product, but it’s especially important when you have bad credit. There are several lenders out there who charge exorbitant interest rates and fees, taking advantage of people who are desperate for credit and don’t know all their options.

“Don’t settle for the first loan offer you receive. Explore your options thoroughly to find an auto loan that best suits your current financial situation,” says Sean Messier, a credit industry analyst for Credit Card Insider.

By shopping around, you’ll have a better idea of which terms are acceptable and which aren’t. Websites like Auto Credit Express allow you to get connected with reputable lenders based on your credit score, simplifying the research process.

Once you have a few lenders to compare, settle on the one that offers the best terms for your situation.

One thing to watch out for when buying a car with no credit is a dealership that offers in-house financing. These “buy here, pay here” dealerships sometimes advertise no credit check or tend not to care what your credit history looks like.

However, these dealerships tend to charge much higher interest rates than even bad-credit lenders, and the chance of repossession is generally higher. What’s more, they likely won’t report your payments to the three national credit reporting agencies, which could help you establish your credit history and qualify for better rates in future.

Save for a big down payment

Some auto lenders that work with no-credit borrowers may require a big down payment just to limit the risk they’re taking on with your loan. If you have the time to save up more, however, it could make you even less of a credit risk and potentially lower your interest rate.

Also, the higher your down payment, the less you need to borrow and the less you’ll pay in interest over the life of the loan.

The pros and cons of buying a car without credit

As you can already see, it’s possible to get a car without a credit history. Before you start the process, though, it’s important to know both the benefits and drawbacks of doing so.

Pros

  • It can help build your credit: You can’t establish a credit history without taking on credit, and an auto loan from a lender that reports account activity to the credit bureaus can be a great start.
  • You’ll get a car when you need it: If you can’t wait to build your credit history another way, getting a no-credit auto loan now can get you into a car now.
  • You can always refinance: Getting a car loan with no credit is expensive. But as you build your credit history over the next year or two, you can apply to refinance the first loan, potentially with a much lower interest rate and better overall terms.

Cons

  • It’s expensive: Even if you avoid “Buy here, pay here” dealerships, you may end up with an interest rate upwards of 20%, something I saw when I worked in auto finance. Depending on the value of your car and how much you’re borrowing, you could end up paying just as much in interest as you did for the car.
  • You’ll need more money down: You’ll be hard-pressed to find a lender who will finance a car for you with no money down. In fact, most typically require a higher down payment than normal to get a loan. There’s no hard-and-fast rule, though, so contact lenders before you apply to get the terns.
  • You could be susceptible to scams and predatory lenders: There are plenty of scammers and predatory lenders who prey on people who don’t think they have any other option. If you’re asked to pay money before you even head to the dealership or the loan terms seem outrageous (tons of fees and interest rates of 30% or higher), those are big red flags.

Consider waiting until you can establish a credit history

If you don’t have a cosigner and can wait a while before you need a car, consider taking the time to build a credit history and establish good credit before you apply for an auto loan.

One way you can do this is by getting added as an authorized user on a family member’s or friend’s credit card account. If the account has a good payment history and a relatively low balance, you can reap the credit benefits of the account without the responsibility of paying the balance.

Another way is to open a credit card account of your own. A secured credit card is a typical option for people with no credit. These cards function similarly to normal credit cards but require an upfront security deposit, which you can get back after demonstrating responsible credit card use or when you close your account.

If you want to avoid a deposit, there are some unsecured options that aren’t terrible, such as the Deserve Classic Mastercard and the Petal Visa Card. These cards are designed specifically for people with no credit history and can help you build credit as you use them regularly and pay your bill on time each month.

“Maintain a history of on-time payments at all costs,” says Messier, “because this is the most important factor in determining your credit scores.”

Finally, consider getting a credit builder loan, which can help you establish a credit history without egregious interest rates.

After you’ve been building credit for at least six months, you’ll get a FICO credit score, which can help improve your chances of getting an auto loan with decent terms. Once your score is 670 or higher, it’ll be considered “good,” which will open up your options even more.

What to do if you can’t wait

If you don’t have the time to work on building your credit history, consider getting an auto loan now from a reputable lender and focusing on building your credit over the next six months to a year. Once your credit score is in a good range, you can apply to refinance the loan, which can save you a lot of money if it comes with a lower interest rate.

As you’re shopping around, though, try to do it quickly.

“Thanks to certain credit-reporting policies, if you apply for several auto loans in a short period of time, only one hard inquiry will be counted against your credit scores,” Messier says.

That period typically lasts 14 days, but it’s sometimes longer.

The bottom line

Getting a car with no credit is possible, but it’s not easy to get the right deal. If you can wait and work on building your credit, you’ll likely save money with more favorable loan terms. If, however, you need the vehicle now, shop around to ensure you get the best terms available and avoid scams and predatory lenders.

Then once you’ve had the chance to build your credit history down the road, you can refinance the auto loan and reduce how much you have to pay.

About the author

Ben Luthi is a personal finance writer who has a degree in finance and was previously a staff writer for NerdWallet and Student Loan Hero.

Written on June 27, 2019

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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