Buying a car with no credit history can be a challenge, but it is not impossible. Car dealerships and lenders view no credit as high-risk because there is no record to indicate the purchaser will pay the debt as agreed. Fortunately, some dealerships offer help and even special deals to individuals with limited or no credit history to help the buyer establish credit. If you are in the market for a new or used car and have no credit, you still have several options to help in your car-buying process.
One of the first steps to buying a car with no credit is to apply for financing. The dealership will assist you in filling out a credit application, typically for a bank it partners with, by asking for several pieces of personal information, including your date of birth and Social Security number. You must also provide address information, current place of employment and sources of other income. Although you have no credit history, the dealership will still attempt to pull a credit report. According to Experian.com, until you have a credit account that reports to the credit bureaus, you will not have a credit file. In this case, your auto loan will be the first credit account on your file.
Another source of financing is through a bank or credit union where you already have a checking or savings account. If your application for financing is approved, the bank will provide a pre-approval letter that outlines the maximum amount it is willing to finance for a new or used vehicle. After you choose a vehicle, the dealer will submit the sales contract to your bank to fund the purchase.
A lender may require that you obtain a co-signer until you have an established credit history. A co-signer is a person who guarantees a debt if you do not repay your loan. This guarantee strengthens your credit application because the co-signer typically has a good credit history and the ability to repay the car loan should you default. This person is usually someone you know and trust such as a parent or other close friend or relative who is willing to accept the responsibility of your debt. Without a credit history, you have a better chance of being approved for a loan with a co-signer.
Some dealerships offer car buyers the opportunity to purchase a car and make monthly or bi-weekly payments directly to the dealer. These are often referred to as "buy here pay here" dealerships. This type of car dealer may advertise "in-house" financing, and many do not require a credit check or strict income guidelines. This means you will not have a traditional bank loan for the purchase of the car, so they are more forgiving if income is lower. Most "buy here pay here" dealers sell only used cars, many with high mileage and no warranty. Due to the nature of this funding and the risks assumed by the dealer, interest rates are often in the double digits. An advantage to purchasing through one of these dealers is that you can buy a car with no credit as most require only proof of income, such as through employment or government sources, and cash for a down payment.
The car-buying process can be confusing and intimidating for the first-time buyer with no credit history. Before you become overwhelmed with the paperwork, the Federal Trade Commission advises that you know the terms of the sales and lending contracts and shop around for the best financing deal. Just because you have no credit does not necessarily mean you are not credit-worthy. Some financial institutions are willing to extend credit based on stable employment and income. Once you obtain that first auto loan, timely payments will help you establish credit and ensure you receive more credit with better terms in the future.
