How to Get a Car Loan With No Credit History

We get asked a lot of questions about car financing, and one of the most prevalent questions is, "How can I get a car loan with no credit history?" Folks who have largely used cash or college grads who might never have opened a credit card or applied for a loan might struggle to get a car loan since they have no real credit history on file to show that they've made regular payments. Also for those who have struggled to keep their credit scores higher than 600 have a tough time finding financing options. 

So, what's a person to do when they have little to show in terms of credit history or poor credit Though there aren't simple options, you do have choices. Here's a look at various for people with credit issues:

1. Save Up and Pay in Cash

We realize that this might be the least palatable option since those who struggle with credit don't always have a lot of cash on hand and tend to live paycheck to paycheck. Plus, it's not exactly easy to drop $20K+ on a new car in cold, hard cash. You're probably better off aiming for a car that's several years old but still in great condition. Toyotas and Hondas hold up incredibly well. For example, you can get a 2007 Honda Accord LX from anywhere between $7,000 and $10,000. 

One of the upsides of paying cash is that there's no risk of getting your car repossessed because you can't make the payments. Also, once the car is fully paid for, you have more monthly income on hand because you have no car payment. The best way to plan for this is to find the kind of car you want and the price you're willing to pay. Set aside a certain amount every paycheck and live off the rest of the money as your monthly budget. Manage your money by eating out less, buying fewer unnecessary items and planning better with your spending. If you set aside a few hundred each month, you can have the cash to buy a $7,000 car in about a year and-a-hafl. Once you've saved enough, pay the car in full and also take comfort that you won't pay one dime in interest. 

2. Take the Time to Shop Around

With bad credit or no credit, don't just assume that you're going to get reamed by lenders or dealerships, though that is the norm. With plenty of research available to you on the internet, do your research. Contact smaller, local banks and credit unions to find out if they have any special programs or rates for those in your situation. Also, if you don't already have a good relationship with your local bank, think about opening an account there and establishing a solid relationship via good account management (e.g., no bounced checks, regular deposits) first. 

Credit unions are non-profit, and they operate on a much smaller level than big banks, so they have more flexibility to help you. If there aren't options, focus on improving your credit over even the course of six months. Guidelines and practical ways to improve your credit standing can be found at Experian. You can also obtain a free, comprehensive credit report every year here. 

3. Bring a Co-Signer 

This is typically a decent option for younger folks who are just starting out in life. A parent can always co-sign for their child, and then they can make sure regular payments are made. This will also build credit for the car buyer since it's titled in their name, and the loan is in their name. The loan is based on the co-signer's credit, and they're agreeing to take over payments if you can't. Make sure you have a very good relationship with your co-signer for obvious reasons. 

The advantage of getting a co-signer is that you can absolutely get a car when you need it. You don't have to wait. But you do need to understand the ramifications of doing so. You are responsible for making the monthly payments, and you may very well owe the co-signer later if you can't make the payments -- it all depends on your relationship with your co-signer. You will also damage your credit if you can't make the payments, so be aware. 

5. Find a "Buy Here, Pay Here" Dealer

Let's say you've investigated all the options. You can't qualify at a bank or lender, nor do you have enough cash on hand or have a co-signer. What's more, you need a car right away for your job, family responsibilities, etc. You can find what's known as a "buy here, pay here" dealer. This is essentially a car dealership that operates independently (not part of a bigger network of manufacturer dealerships) and can underwrite their own loans. 

This translates to very high interest rates and puts the burden on the buyer to drop off payment every month at the dealership instead of mailing a check. It's by no means recommended, but when you have no options, it may be your only choice. The upside is that if you make the regular payments, you can boost your credit so you're better prepared to buy at lower rates next time you need a car. 

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