Buy a New Car With No Credit History

Just because you don’t have any credit doesn’t mean that you aren’t a responsible citizen—and many lenders understand that. They just want proof that you’re good for the money. When looking for a car from a dealership, there are some steps you can take to convince both salesmen and lenders to take you on, even with a credit score of zero.

Steps

Looking at Your Finances

1. Take stock of what you can afford. Before heading out to make a car purchase, you need to look realistically at your finances. If you have no credit history, that doesn’t mean you’re bad at paying off debts—it just means you haven’t had reason to, and creditors like to see evidence that you can pay your loans. The bigger the cash down payment, the better, because it cuts down on the total financing amount and may improve your chances of getting accepted for a loan.
   • Look at your checking account and do some budgeting. How much extra income can you take out of checking right now without negatively affecting your bills?
   • Look at your savings account. What money is expendable?
   • If you don’t have much available for a down payment, consider starting a strict savings plan and going car shopping again once you have more money. Lenders are more willing to take you without credit when you can pay at least 20% for the down payment.
   • Also consider how much you will need to set aside monthly for car insurance, gas, and maintenance.
2. Pull your credit scores. It is helpful to know how lenders are going to see you before you start applying for car loans, especially without a credit history. This may seem counterintuitive if you don’t have a credit history, but you may be surprised to find things on your record. Pull your Read a Credit Report from all three of the credit bureaus—TransUnion, Experian, and Equifax.
   • You can find your credit reports in several ways. On the bureau websites, they charge about $40 for a one-time check of all three reports and your credit score, but a law called the Fair Credit Reporting Act requires that the bureaus give you a free report once every 12 months. You can also inquire about a free credit report from your bank.
   • Mistakes on your credit history can affect your interest rate and whether or not you get accepted for a loan, and you can dispute these mistakes. You should submit your disputes in writing to the credit bureaus.
3. Open a credit account. Opening a credit account as soon as you decide you want to take out a car loan will help your credit score if you have no history. For example, a secured credit card is useful because it doesn’t require a credit history to apply for.
   • Bring documentation of this credit card to lenders when applying for a car loan.
4. Investigate credit insurance. You can purchase Understand Credit Insurance specifically for covering your loan in a loss of income situation. Credit insurance covers your payments, either partially or in full, in the event that you are unable to pay your loan. This can help protect your credit score against events beyond your control. Credit life insurance, disability insurance, and property insurance are all options available to consumers. A lender may feel more comfortable extending you a loan if they know you are willing to cover it in an emergency.
   • Consider the monthly cost of these types of insurance. It can be expensive.
5. Determine if you can afford extras. At the end of the car buying experience, you will be asked if you want to tack on extra expenses like extended warranties and payment protection plans. Make sure you know how much these kinds of extras cost, how much help they are, and if you can afford them.
   • Extended car warranties can ensure you don’t have to pay for big repairs. The flip-side of this is an extra expense, sometimes over $1,000. And keep in mind that if you are buying a relatively new or used car, you probably won’t even need the warranty since they often only cover major repairs like engine or transmission failure.
     • New cars, as well as some used cars, have warranties that protect the vehicle for years, so extended warranties rarely make financial sense.
   • Payment protection plans are similar to credit insurance, only they are provided by the dealers themselves. The deal is that if you can’t make your payments, the dealer offers to cover you for a few months.
   • However, payment protection plans are highly restrictive and the dealer only becomes liable if the purchaser dies, gets seriously ill, or becomes unemployed. Most financial professionals discourage the purchase of payment plans since they are expensive and rarely pay off.
6. See if you have what lenders want. Once you’ve reviewed your finances and seen your credit score, think about what lenders are looking for and consider if you have it. Lenders look favorably on people with a mid-range credit score (620-680), higher income, and having been with the same employer for a few years.
   • If this doesn’t describe you (and it likely doesn’t if you have no credit history) that’s not a deal breaker. There are other ways to get a loan without a credit history.
   • If you don’t have these things, you may want to find a co-signer who does to help prove that you are good for the loan. However, by co-signing on the loan, your co-signer is now legally liable for any payments you fail to make, which can have negative consequences for their credit score or financial health. Make sure both you and your co-signer know the associated risks before signing.

Gathering Your Paperwork

1. Find proof of employment. In order to prove that you are not a risky investment to lenders, you need to provide proof of employment. Gather both paper and electronic copies of as many of these documents as you can locate:
   • Last year’s W2 tax form
   • Pay stubs showing 6 months of employment
   • An offer letter from your current employer with the salary listed
2. Show your assets. Some lenders will take assets as collateral when you have no credit history. If you have large investments that you are willing to put up as collateral, this may make lenders more inclined to take you on.
   • Financial institutions are more willing to accept collateral in addition to the auto being financed and the borrower is likely to get better terms at these financial institutions than at a dealer that does not accept collateral.
   • Of course, if you have no credit history, this means you were given the assets or paid cash up front for them.
3. Get some references. Having people who can vouch for your commitment to paying back loans is helpful, especially if you have taken personal loans from people and paid them back. Make a list of at least six people with their names and contact info.
   • References are also useful in applying for discounts such as a first-time buyer discount.
4. Find proof of school or military status. If you want to be considered for a discount by a car dealership, show proof of being a student (or recently graduated) or in the military. Loan companies may also look favorably on your participation in such organizations.
   • Proof can be your ID card, enrollment papers, or diploma.
5. Print out your credit reports. Lenders will make credit history inquires on their own, but having your report and score on your person can improve your odds, especially if you made recent changes to mistakes on your history. Having these numbers can also help your salesman find a price that could potentially be balanced by a good interest rate.

Negotiating the Loan

1. Find loans on your own. When you go to a dealer for a new car, chances are your salesman will try to find you a loan using his system. However, you might be able to get a loan from your bank at a better interest rate. If you bank at a credit union, your odds are higher of getting a loan because these institutions are smaller and more willing to work with you personally.
   • You may also be able to get a loan with a credit union even if you don’t bank there.
   • Consider the website Peer to Peer, where you can get a loan from an individual instead of an institution.
   • Consider borrowing money from a relative.
2. Seek out a co-signer. Find someone who has good credit amongst your friends and family to co-sign on your car loan. This will boost a lender’s confidence in the loan. Make sure it is someone who trusts you, because the record of this loan goes on both your credit reports.
   • If you ever default on this loan, the lender will look to the co-signer for payment, making your relationship very uncomfortable.
3. Make sure your loan has a low APR. If you are offered a loan, make sure it has a low enough interest rate to keep your monthly payments low. For example, someone with a mid-range credit score (620-680) is looking at an interest rate of between 5 and 6%.
   • A credit score lower than that is looking at an interest rate anywhere from 6.5 to 13%.
4. Try to get a loan with a shorter term. Although monthly payments might be higher, getting a loan for a shorter amount of time means paying less interest in the long run. If you can handle it financially, try to get a loan for four years or less.
5. Look into getting discounts. Some lenders and car lots will give you discounts based on things you have done and memberships you have. If you qualify for a discount of any kind, bring the paperwork for it.
   • Some places (both dealerships and lenders) will offer discounts for being a student, a recent graduate, being in the military, or being a first-time buyer.
   • All of these discounts tend to come with strict requirements. For example, the first-time buyer discount may require 10% down, references, a steady job, and car insurance.
   • You may be able to get a lower monthly payment if you lease instead of buy.
6. Revisit the loan in a few months. If you are jobless when you start the car search and no lenders will take you, consider pausing the search until you have worked steadily for several months. This will build your reputation as a responsible citizen. Be sure to bring in proof of employment when you resume the search.
   • Also consider doing things to boost your credit while you wait, such as getting a credit card.
7. Pay cash in full. Ultimately, the easiest way to buy a car without any credit is to pay cash for the entire vehicle. This practice is wise because it keeps you from going into debt and defaulting on loans, but it is also risky because it means you will continue to have an empty credit history.
   • Car dealers who receive $10,000 or more in cash are required to report the transaction and its specifics to the IRS.

Tips

• If you don’t have a lot of money and don’t want to take out a loan, skip the dealership and look for a car sold by an individual. You can find lots of used cars on classified websites like craigslist and Bookoo for reasonable prices. Such sellers usually ask for cash on the spot. You also have to take the signed title to your local county clerk in order to register it and pay taxes on the purchase, things that are usually taken care of by a dealership. This also means that you won’t have record of a purchase on your credit history.

Related Articles

• Save for a New Car
• Choose a New Convertible
• Shop for a Safe Car for Child Passengers
• Finance a New Car
• Inspect a Newly Purchased Vehicle Before Delivery
• Buy a New Car Online at AutoTrader
• Buy a New Car Through Fleet Sales

Sources and Citations

See also

• Buy a New Car
• Inspect a Newly Purchased Vehicle Before Delivery
• Buy a New Car Through Fleet Sales
• Buy a New Ferrari

What links here

• Buy or Lease a Car when You Have Bad Credit
• Buy a New Car