You may have a job, money for a good down payment, and a track record of paying bills. However, if you don’t have a credit history or credit score, you may have difficulties applying for a car loan. Next, we will analyze this topic in depth and explain how to buy a car without credit.
Depending on who you talk to about your situation, you may hear that it’s difficult or impossible to buy a car when you don’t have credit. But don’t worry because you are not alone. About 100 million people in the United States have no credit or it’s so insignificant that they don’t have a credit score, says Matt Joiner, automotive product manager for Experian, one of the top three US credit bureaus.
The positive side? Despite the difficulties, getting that car loan (and making all your payments on time) will establish your credit. So this is likely a one time issue. When you need another credit, you will already have the purchase of your first car in your history.
Trying to get that first loan can make you feel at the foot of Everest as you look up, but don’t despair. buy a car without credit It can be difficult but not impossible. Here are the steps to follow.
How to buy a car without credit
Next we will talk about 6 options for buy a car without credit:
- Get a co-signer
- Test on alternative credit data
- Consider dealer financing
- Consider community banks and credit unions
- market loans
- Leveraging your retirement account
1. Get a co-signer
If you go to a bank or car dealership with no credit at some point someone will ask if you can get a co-signer.
A co-signer allows you to “borrow” their good credit history so you can get a car loan. You also agree to make the payments if you cannot make them yourself.
What lenders often fail to mention is that this is a very bad deal for the co-signer. Why?
- They are fully responsible for your loan, if you do not meet your obligation.
- Any late or missed payments will become part of your credit history (and will lower your score).
- Your loan will be counted among your debts when you apply for loans or credit cards.
This means card issuers could raise their rates or lower their lines of credit, in light of the new co-signer loan. This could make it harder (or more expensive) for you to get credit in the future.
2. Try alternative credit data
You don’t have a credit card or a mortgage. But you could have a checking account, a mobile, a utility bill or a rent payment.
And some credit score formulas, like FICO XD, will include some of these elements, often alternative or non-traditional credit data, because it’s not used by traditional credit scoring models. If you have been responsible with your bills, you can demonstrate your ability to make regular and timely payments.
The downside of this option: There is no conclusive evidence that auto lenders are using alternative credit scoring models on a regular basis.
Another option, Experian Boost, is not a separate scoring model – but rather a way to potentially increase your existing Experian score using alternative data. And it is the consumer, not the lender, who chooses whether or not to use it.
How does it work? You enroll in the program with Experian and give the company access to your online checking account records. The program filters and gives you credit for recurring and one-time payments. Late payments or negative data are ignored.
Among consumers who see an increase, scores go up an average of 13 points, there are also cases like that of a CreditCards.com publisher who saw his credit score go up 44 points in just 10 minutes when signing up for Experian Boost. Consumers can also discontinue the service at any time.
On the other hand, your car lender has to use Experian data in your subscription (different lenders use different offices). In addition, you have to be enrolled in online banking. And you will be sharing your bank details with another entity.
3. Consider dealer financing
You’ve seen the for-sale ads: “Bad credit, no credit – no problem.”
So can a buyer with little or no credit get a car loan from a brand name car dealer? That depends on the dealer.
If it’s a brand-name dealer with a good reputation tied to a large automaker, it might be worth making a phone call to the finance manager to ask a couple of questions:
- Can they really work with someone who has no credit score (which is very different from having bad credit)?
- If so, what would they need to make the loan? Pay stubs and work history? A cosigner? And would loans without credit be accepted for all the cars on the lot or just a few?
Last but not least, what percentage would you have to put down and what range of interest rates could you assume?
WARNING: There are things to avoid, such as unnecessary add-ons (life insurance, loan insurance), contracts that aren’t complete or don’t include the interest rate, and car loans that are likely to exceed the life of the car, says Rebecca Borné , Senior Policy Advisor at the Center for Responsible Lending.
4. Consider community banks and credit unions
Some small independent and community banks and credit unions take a more personal approach to lending. Others use more or less the same process as the big banks.
The challenge for car buyers is to find out what really goes on behind the scenes. Therefore, looking for institutions that offer programs for first time buyers is a good option. “They are designed for people with no credit or little credit,” says Borné.
These institutions may also use what professionals call “manual underwriting” (when a lender looks at your financial records by hand, individually, instead of entering the numbers into an automated program).
Another sign that you can get special help and attention: Look for a smaller bank or credit union that has been designated a CDFI (Community Development Financial Institution), says Walter Merkle, vice president of lending at the Washington-based Lower Valley Credit Union. These lenders focus on making loans in areas and populations that need an economic boost.
Lower Valley has a program for first-time car buyers, and it uses manual subscription. “We try to take our loan applications on a case-by-case basis,” he says.
Merkle’s advice for finding something in your area: Find who is out there in your community, looking to help people like you, he says.
If you find a lender willing to work with you, they will typically look at pay stubs, job stability, reasons why you don’t have credit, and your history of paying monthly bills.
5. Market loans
Today, there is a market for everything, including loans. And market loans are an option to consider.
How does it work: A broker takes your personal financial data, along with the size and term of the loan you want, and offers that profile to a large number of investors, says Anuj Nayar, the director of financial health at LendingClub, a marketplace loan broker.
An investor can decide to grant the loan or not. Or it may decide to offer you different conditions (less money, different payment terms, etc.).
What you should know: Not all brokers work with borrowers with no credit. And not all brokers work with auto loans, although many do facilitate personal loans (unsecured loans that can be used for a car).
With marketplace loans, it’s a good idea to research brokers carefully. You will be sharing some personal data, so take branded brokers that have a good track record. Ask them how they share your profile and what happens to it after the loan process is complete, as well as how much they can lend to a borrower with no credit and the range of rates.
6. Take money from your retirement account
If you have no credit but have been putting money away in a retirement account, you might be able to take out a loan to buy a car. But you have to read the fine print carefully, because some types of withdrawal accounts make it easy, but others can come with big fees and penalties.
For example, with a 401(k), your company’s plan may limit how much you can borrow and for what. It will also set the interest rate.
Keep in mind that if you quit or are fired, you could have as little as two to three months (depending on the company) to pay off the loan or face a possible 10 percent penalty.
With a Roth IRA, you can withdraw any money you’ve deposited (not interest) at any time for any reason. But you should know that you may be losing decades of interest. And in retirement accounts, that’s precisely the magic that helps you grow your money.