Buying a car if you don’t have credit can be difficult but not impossible. These tips can help you unlock access to a loan for a car and build credit along the way.
You have a good job, a healthy down payment and a great record of paying bills on time. But without a credit history or credit score, you won’t necessarily be able to get a car loan.
Depending on who you ask, it can be somewhere between difficult and impossible to buy a car when you have no credit.
No matter what your reason for not having credit, you’re far from alone. Up to 100 million people in the U.S. have no credit or so little credit that they don’t have a credit score, says Matt Joiner, automotive product manager for Experian, one of the three main U.S. credit bureaus.
On the bright side, getting that car loan (and making all your payments on time) will establish your credit. So, this is likely to be a one-time problem. But securing that first auto loan can feel like standing at the bottom of Everest and looking straight up.
Don’t despair, however. Buying a car with no credit might be difficult but not impossible. Here are six options to consider.
See related: How to buy a car with your credit card
6 options to consider when buying a car with no credit
1. Get a co-signer
Walk into a bank or car dealer with no credit and at some point, someone will ask if you can get a co-signer.
With a car loan, a co-signer lets you “borrow” their good credit history. They also pledge to pick up the payments if you can’t make them.
What lenders may not mention: This is a really rotten deal for the co-signer.
- They are completely responsible for your loan, if you default.
- Any late or missed payments will go on their credit history (and drag down their scores).
- The amount of your loan will be counted among their debts whenever they apply for loans or credit cards.
This means card issuers could raise their rates or cut their credit lines, in light of the new loan. This could make it more difficult (or expensive) for them to get credit in the future.
2. Tap alternative credit data
You don’t have a credit card or a mortgage. But you might have a checking account, cellphone, utility bill or a rent payment.
And some credit scoring formulas, like FICO XD, will include some of these items, often alternative or nontraditional credit data – because they’re not used by traditional credit scoring models. If you’ve been responsible with bills, they can demonstrate your ability to make regular timely payments.And now the bad news: There’s no conclusive evidence that auto lenders are using alternative credit scoring models on a wide scale.
Another option, Experian Boost, isn’t a separate score model – but a way of potentially increasing your existing Experian score using alternative data. And it’s the consumer, not the lender, who chooses whether to use it.
How it works: You sign up for the program with Experian and give the company access to your online checking account records. It sifts through and gives you credit for reoccurring, timely payments. Late payments or negative data are ignored, says Joiner.
Among consumers who see an increase, scores go up an average of 13 points, he says – but a CreditCards.com editor saw her credit score go up by 44 points in only 10 minutes by enrolling in Experian Boost. Consumers can also discontinue the service whenever they like.
The trade-offs: Your auto lender has to use the Experian data in its underwriting (different lenders use different bureaus). Also, you have to be enrolled in online banking. And you’re sharing your banking data with another entity.
3. Consider dealer financing
You’ve seen the sale ads: “Bad credit, no credit – no problem.”
So can a buyer with little or no credit get a car loan at a regular, name-brand auto dealer? That depends on the dealer.
If it’s a name-brand dealership with a good reputation linked to a major car maker, it might pay to make a phone call to the finance manager and nail down a couple of the details.
- Can they truly work with someone who has no credit score (which is much different from having bad credit)?
- If so, what would they require to make the loan? Pay stubs and job history? A co-signer? And are their no-credit loans good for all the cars on the lot or only a select few?
Last, but not least, what percentage would you need to put down, and what range of interest rates you can expect?
Some red flags to avoid: Unnecessary add-ons (life insurance, loan insurance), contracts that aren’t complete or don’t include the interest rate and auto loans that are likely to exceed the useful life of the car, says Rebecca Borné, senior policy counsel for the Center for Responsible Lending.
4. Consider community banks and credit unions
Some small independent and community banks and credit unions take a more personal approach to lending. Others use pretty much the same process as the big banks.
The challenge for car buyers is to find out what really goes on behind the scenes.
One key: Look for institutions that offer programs for first-time buyers.
“They’re designed for people with no credit or thin credit,” says Borné.
These institutions may also use what pros call “manual underwriting” (when a lender looks at your financial records by hand, individually, instead of feeding the numbers into an automated program).
Another sign you can get some special help and attention: Look for a smaller bank or credit union that’s been designated as a CDFI (Community Development Financial Institution), says Walter Merkle, vice president of lending for the Washington-based Lower Valley Credit Union. These lenders are focused on making loans in areas and populations that need an economic boost.
Lower Valley has a program for first-time car buyers, and it uses manual underwriting.
“We try to take our loan requests on a case-by-case basis,” he says.
Merkle’s advice for finding something in your area: Look for “who’s out there in your community looking to help people like you,” he says.
If you find a lender willing to work with you, they’ll typically look at pay stubs, job stability, the reasons you don’t have credit and your monthly bill payment history.
5. Marketplace loans
These days, there’s a market for everything – including loans.
And marketplace loans are a variation on that concept.
How it works: A broker takes your personal financial data, along with the size and term of the loan you want, and shops that profile to a host of investors, says Anuj Nayar, the chief financial health officer for LendingClub, a marketplace loan broker.
An investor may decide to grant the loan or not. Or they may decide to offer you different terms (less money, different repayment term, etc.).
What you need to know: Not all brokers will work with no-credit borrowers. And not every broker deals with auto loans – though many facilitate personal loans (unsecured loans that can be used for a car).
With marketplace loans, you want to research brokers carefully. You’re sharing some personal data, so stick with name brand brokers that have a good track record. Ask about how they share your profile and what happens to it after the loan process has concluded, as well as how much they can lend a no-credit borrower and the range of rates.
6. Tap your retirement account
If you don’t have credit but have been squirreling away money in a retirement account, you might be able to borrow from that to get a car. But you want to read the fine print carefully, because while some types of retirement accounts make this easy, others can come with hefty fees and penalties.
For instance, with a 401(k), your company’s plan may limit how much you can borrow – and why. It will also set the interest rate.
But if you quit or are let go, you could have as little as two to three months (depending on the company), to repay the loan – or face a possible 10 percent penalty.
With a Roth IRA, you can withdraw any of the money you’ve deposited (not the interest) at any time for any reason. But realize that you may be losing decades of interest. And with retirement accounts, that’s the magic that helps you grow that money.