How to Get an Auto Loan With No Credit History

People who haven't yet established a credit history may consider getting auto loans by applying with co-signers who have good or excellent credit. Making a large down payment might also work. Alternatively, you could even look for loans designed for borrowers with no credit histories, although these tend to come with higher-than-usual interest rates.

While getting an auto loan with no credit history is possible, the process is usually more challenging than it would be if you had good or excellent credit. Besides, qualifying for a conventional auto loan with no credit history is very difficult because providers of such loans would view you as a high-risk borrower. People with no credit history have limited options and typically pay high interest rates.

Getting a co-signer with good creditworthiness to apply with you is one way to qualify for a regular auto loan. However, the co-signer becomes liable to pay the loan if you default, so finding one might not be easy. Another option is to apply for a no-credit auto loan.

Remember that having no credit history is better than having a poor credit score because the latter indicates that you’ve been irresponsible in handling your finances. In addition, repairing poor credit usually takes more time and effort than building it from scratch.

Creditworthiness refers to how much risk a borrower poses to a lender when seeking credit. For example, an auto loan provider would consider you creditworthy if it is willing to grant you a loan. Your credit score is a direct indicator of your creditworthiness. While a high credit score means you have good creditworthiness, the converse holds true as well.

• Creditworthiness: Your ability to qualify for credit.
• Credit report: Includes details about outstanding balances, credit limits, payments, late/missed payments, past-due amounts and bankruptcies.
• Credit score: A numerical representation of your creditworthiness based on your credit report.

Factors that affect your credit score include your payment history, your credit utilization ratio, the average age of your credit accounts, how often you apply for new credit and your credit mix. Your credit utilization ratio refers to the amount of credit you’ve used from your total available credit.

When you apply for an auto loan, a lender will look at your credit score to determine how creditworthy you are to make a decision. Your credit score also plays a role in the interest rate you get because people with excellent credit scores tend to qualify for the lowest rates. People with no credit history, on the other hand, typically have to make do with loans that come with high interest rates.

Having no credit history means credit bureaus have not received information about any of your bill payments yet. It also means you’ve not taken out a loan or gotten a credit card or another credit-related product yet because most lenders report credit-related information to credit bureaus. The absence of a credit history does not imply you are irresponsible with your finances. It highlights that you’ve not used credit and, therefore, have no credit score.

Bear in mind, though, that it’s possible to have a credit score without using any credit-related product. This is by getting your rent, utility, phone and other payments reflected on your credit reports.

Having bad credit indicates you’ve had trouble managing your debt. Some of the most common reasons for bad creditworthiness include late payments, accounts in collection, charge-offs, defaults and poor credit utilization ratios.

Auto loan providers view applicants with poor credit scores as higher-risk borrowers than those with no credit history. This is because the former have already faced documented challenges in keeping up with their finances.

If you're looking for a no-credit auto loan, you can choose from online lenders, car dealers that offer to finance, some banks and credit unions.

Building a good credit score requires that you handle all the credit made available to you responsibly. Bear in mind that building credit does not happen overnight. It takes perseverance and patience. But you may start seeing signs of improvement in as little as six months.

If you're unable to get an auto loan to buy a car, there are a few other options you might explore.

• Ask a relative/friend for money: Since financial matters can be a source of tension and strife, it's best to tread lightly down this path. Ideally, put details of the agreement on paper and have a repayment schedule set up in advance.
• Use public transportation: If you've used public transportation until now, consider using it for a little longer. That could give you time to build your credit score and save for a larger down payment.
• Look for a more affordable vehicle: If you are set on buying a new car, consider getting a used one instead. Alternatively, look for a vehicle that's easier on your wallet.

Take a look at other commonly asked questions about how to get an auto loan with no credit history to determine if you might qualify for one.