Financing for First-Time Car Buyers with No Credit

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Most of us don’t have a massive lump sum of cash sitting around we can use to buy a car in full — especially if you have our eye on a new or close-to-new one. So, we depend on the opportunity to take out a loan to purchase our vehicles.

It’s also true that lenders make decisions about who they’ll loan money to based largely on credit standing. However, if you have no credit history to speak of or a track record with a few hiccups, you may still be able to qualify for a loan. There’s still hope — if you know where to look and what to expect. Knowing the challenges associated with getting auto financing with no credit is a great first step.

Here’s what first-time car buyers with no credit should know about auto financing.

What to Expect from a No-Credit Loan

The good news is that some drivers are able to buy a car without credit or with poor credit. The less-good news is that you can expect the loan to carry higher interest rates — and you probably will not have the range of choice payment options available to someone with strong credit, either.

You can generally get a sense from lenders whether or not they’ll be willing to work with someone without credit, or with credit issues, from their preapproval process. There are even lenders that specialize in giving first-time car buyers loans.

Strengthening Your Application with a Cosigner

One option is basically “borrowing” someone’s longer, better credit score by adding them as a cosigner to your loan application. An example would be a recent college graduate asking a parent to cosign on a loan so they can purchase their first car, although there are many possible configurations.

According to Experian, cosigners generally need to have credit ratings at or above 670, although the specific figure will vary from lender to lender. Lenders will also examine the cosigner’s debt-to-income ratio — or what they owe per month versus their income — to make sure they could comfortably cover the loan in the event you cease payments as the primary borrower. 

This brings us to the main risk of bringing in a cosigner: They are just as responsible for paying the loan back in full as you are in the event you default. This means both parties need to be ready to take on a long-term commitment. However long your loan lasts, that’s how long your financial relationship will last. Make sure you’re on the same page before even applying.

Save Up a Healthy Down Payment

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One thing you can do to show lenders you’re taking the car-buying process seriously is save up a sizeable down payment. Without a credit rating to bolster your application, it will help to have at least 20 percent of the vehicle’s value ready to go as a down payment — and to be able to demonstrate this fact to lenders and dealers. Having more saved up can increase your chances even more by making you appear more financially secure from the lenders’ point of view.

Besides a down payment, providing proof of income, a stable history of employment and proof of savings can help strengthen your chances of getting approved for a loan — despite your lack of credit history.

First-time car buyers without a substantial credit history built up can often still get financing for a vehicle, with or without a cosigner. It comes down to finding the right lender willing to work with you and being able to produce other forms of worthiness — like stable income and a down payment. 

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