Getting a car loan without having a credit score often isn’t quick or easy.
Even when you’re upfront about your unique circumstances, some lenders may offer assurances, then run the numbers the same way they always do.
And after they verify your no-score situation, you’re often either shown the door or quizzed on whether you can produce a creditworthy co-signer.
The reason: Many lenders don’t really perform manual (think “eyes-on-paper”) underwriting. Instead, they feed the information into a computer, and the program analyzes the lender’s risk. Often, that first electronic filter is a credit score within a set range.
Don’t have a score at all? Buh-bye.
If this is you, you have plenty of company. An estimated 53 million people in the U.S. (about 1 in 6), don’t have a credit score, says David Shellenberger, senior director with FICO, the company that pioneered credit scoring.
Some, such as college students and new grads, don’t have scores because they’ve never had credit (see our best cards for students and new grads). Others, including working families or retirees, may not have used credit in a while, so they don’t enough recent activity to generate a score. “People should know if they absolutely have to get a car and have some money, they probably can” get financing, says Philip Reed, senior consumer advice editor for Edmunds.com.
Here are six things to keep in mind.
1. Be patient, ask questions; don’t act out of desperation
“The key thing is when you start the process, don’t assume you won’t qualify,” says Jeff Bartlett, deputy automotive editor for Consumer Reports.
Reed agrees. Don’t make decisions out of desperation, he says. “If you do find financing, don’t automatically assume you have to take it. You may be able to do better.”
Be strategic. Start by making a list of potential lenders. Include institutions where you have accounts and some smaller community banks and credit unions, says Mike Schenk, vice president of economics and statistics at the Credit Union National Association.
Before you apply, ask questions to screen your prospects. Do they do any manual underwriting for auto loans? Can they? Can they make loans to someone with no score? If so, how does that process work?
Anytime someone answers “yes,” press for details. What will they do for you that differs from their normal lending process? And will you need to do?
Be ready to demonstrate that you’re a good risk. Some factors that work in your favor: a record of bills paid on time, a steady income, a healthy down payment and sufficient disposable income to repay your new loan.
“You’ve got to be prepared to tell your story and support your argument,” says Schenk. “Ultimately what all lenders want is to be paid back, preferably on time.”
2. You may be able to revive your score
If you’ve had credit but haven’t used it in a while, you might be able to resuscitate that score before you apply.
A credit score requires a past credit history and evidence you’ve used credit fairly recently, says Shellenberger. If you lack either, the formula might not be able to generate a score for you.
One possible solution: If you have a working credit card, use it for something small, and pay it off immediately. As soon as the issuer reports to the credit bureaus (usually once a month), you should have a credit score.
Don’t have a history to reactivate? If you’re new to credit and you can wait six months to a year for a car, consider getting a credit card first. For credit newbies, a secured credit card card with a small credit line may be easier to obtain than a car loan, says Schenk.
After six months, you’ll have enough of a credit history to generate a FICO score, says Ethan Dornhelm, senior principal scientist at FICO, the company that pioneered credit scores.
To make it a good score: Use the card for small amounts, keep the monthly balance to 20 percent or less of your credit line, and pay the entire balance on time each month, he advises.
3. Shop with your credit score in mind
Every time you apply for a loan, a hard inquiry goes on your credit history, and your credit score can take a hit. The damage is greater when there’s little positive credit history to balance it out.
The workaround: While some scoring models allow as much as 45 days to shop for a loan without excessive inquiries hurting your score, stay on the safe side by keeping all your auto-loan applications within a 14-day period and the scoring formula (no matter which one is used) will treat the entire group as one application, limiting potential score damage.
So what does that mean for someone without a score? While you’re applying it won’t have any affect at all.
But once you have a credit score (months after you get the loan), those inquiries on your credit history will be a factor. And your score will feel the effects until the inquiries are a year old, according to FICO. After that, they no longer count.
4. Separate price negotiation from financing
“The dealership is going to have access to multiple lenders,” says Bartlett. In addition, some brands offer programs for new grads “understanding their unique circumstances,” he says. Others may relax standards if they have excess inventory, he adds.
If you’ve already been rejected for financing, “it’s really easy” to take the first offer a dealer makes, says Schenk. But you should still haggle.
This is a two-step dance. First, negotiate the price of the car, he says. After you reach an agreement on price, then you can ask about financing.
If the salesperson tries to blend the two, say you already have financing elsewhere, Schenk says. “Otherwise you don’t know what you’re paying.”
Once you lock in the purchase price, mention that you’re also curious about any financing deals they have, he adds.
One place you can save money: Refuse any “credit repair” products and make sure none are included in your loan, says Chris Kukla, senior vice president at the Center for Responsible Lending, a consumer advocacy group focused on fair lending practices.
“They’re useless, and they’re often sold to people with ‘thin’ credit files,” he says.
In June, three New York state auto dealers have agreed to return $13.5 million to consumers after bundling credit repair and identity-theft protection products into auto contracts, according to a written statement from the New York attorney general’s office. In some cases, these products added as much as $2,000 to the car’s price.
What you need to know: If you get the loan, you’ll have a score soon enough.
5. You may pay more
No credit score? The lenders willing to work with you will likely offer higher interest rates, or ask for larger down payments, or both.
Interest rates will vary with your situation and lender, but you’ll likely see something in the 10 to 20 percent range, Bartlett says.
And rates from 15 to 30 percent aren’t unheard of either, says Kukla.
Lenders may also ask for more money down. And Bartlett recommends that score-free borrowers put at least 20 percent down.
Not prepared with that lump sum? This is another factor that you can negotiate, says Schenk. “Don’t let that scare you off.”
Are higher interest rates and larger down payments shredding your proposed budget? Instead of stretching out the loan over a longer time frame, consider scaling back to a more basic car, says Bartlett.
A five- or six-year commitment at higher-than-expected rates “is digging yourself into a big money pit,” he adds.
Not to mention “You want to be very careful how long you’re financing beyond the warranty,” Bartlett says. “After that point you’re creating new financial risks.”
And be wary of a subprime lender who “charges an extraordinarily high interest rate and promises you can refinance later,” says Kukla. “Don’t fall for that one. In many cases, the way the deals are structured, you won’t be able to refinance any time soon.”
6. Leasing could be an option
Today’s lending standards could make leasing an option for potential buyers who don’t have a score, Bartlett says.
An added benefit? Like a car loan, a lease is reported to your credit history, which builds your credit, he says. So even with no previous credit history at all, you’ll have a FICO credit score after six months of reported payments.
And with a lease, “you’re not stuck with the car forever,” says Bartlett. “In two or three years, you can trade up.”
His tip for getting the best deal: “Leasing is a form of financing,” he says. You don’t have to take the deal as offered. You can negotiate.
But, unlike buying, there can be extra costs based on mileage restrictions and wear and tear, Bartlett says.
His advice: Before you finalize anything, have a working knowledge of the fees and fine print.