If you’ve got bad credit or no credit, buying a car will be more difficult. Lenders usually want to lend to buyers with a demonstrated history of good credit and on-time payments, but there are lenders who specialize in helping people with low or no credit.
If you’re able to wait six months to a year before buying a car, that will give you time to build up your credit to ensure you’re paying lower interest rates when you do get a car loan
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Your credit history matters
Your credit history gives lenders an idea of your credit risks, and whether or not you’ve been a good borrower in the past.
If you have a history of paying your credit card bills, student loans and other financial obligations on time, a car dealer will see you as a good candidate to buy.
For a variety of reasons, many people don’t have great credit.
For them, the odds are often stacked against them when trying to buy a car. If a dealer sees you’ve got a low credit rating, odds are you’ll be offered a loan with a high interest rate (if at all), and you’ll end up paying more per month and over the term of the loan than someone with good credit.
It is always a good idea to know your credit. You can check your credit score online for free with one of the major credit reporting bureaus.
Key Takeaway A credit rating of 720 puts you in an excellent position to secure a car loan with low interest rates.
Finding an auto loan without credit
Even with low or no credit, don’t despair. There are still plenty of options available to secure an auto loan.
Lenders that work with all credit history profiles
There are lenders who specialize in helping secure car loans for those with little or no credit. You’ll most likely need to show proof of income to demonstrate that you’ll be able to honor the terms of a car loan.
Keep in mind, a lender specializing in helping clients with low credit may restrict which dealerships you’re able to execute the loan.
Special financing for credit
Luckily, programs exist to help people without credit to secure loans.
For students and recent graduates, you may be able to find special financing for car loans at your bank or credit union. Amongst the factors you’ll be assessed on to determine your suitability for a loan:
Some car dealerships offer BHPH (Buy Here Pay Here) options. A dealer assesses your suitability for a car loan based on your employment history, current job, and other factors to get an idea if you’ll make your payments on time.
One thing to keep in mind about BPHP programs is they may not report your payments to credit bureaus, as these loans are financed in-house and not through a third party.
If you’re interested in using a BHPH to secure a loan, make sure the dealer will report your payments to a credit bureau. Otherwise, you’ll be robbed of a chance to build your credit.
Credit Unions
If you can’t find a lender or specific program to help you secure a loan, look to a credit union. They have a reputation for working with people without credit and/or difficult financial situations.
A credit union may help you secure a car loan that helps you build your credit up. Keep in mind, if you want to seek a credit union’s help in getting a loan, you’ll have to become a member first.
How to boost your odds of getting a car loan
If you’re worried about your low credit rating holding you back from buying a car, take a breath and remember there are ways you can improve your chances.
Get a co-signer
If there is someone who can vouch for you (a spouse, a parent) and attest to your history of making payments on time, a dealer may allow them to co-sign a loan alongside you.
A few things to remember — any co-signer must have good credit. Also, by co-signing your car loan, your co-signer is depending on you to make your payments on time. If you don’t, both of your credit scores will suffer. This may make dinnertime conversations especially awkward.
Steady income
If you can show a car dealer that you hold a steady job with a consistent income, this will definitely help your cause in your quest to secure an auto loan. A steady job is hard evidence of money coming in, and presumes you’ll be able to make loan payments on time.
Down payment
If you’re a student with little or no credit history, a decent down payment is usually required to qualify for a car loan. While this means you’ll have to fork over more money upfront, this decreases the overall size of the loan, as well as the amount you’ll have to pay back.
Another benefit of making a good-sized down payment means you’re less likely to go upside down on your loan. Going upside down on your loan means you’ve reached a point where the balance remaining on your loan is greater than the car is worth.
Shop around
If you’re looking for a loan without exorbitantly high interest rates, shop around. Weigh any offers from dealers, credit unions or student loan offers to find a car loan with the lowest interest rate.
Build Credit
If you’re finding it impossible to find a loan due to low or no credit, you can always wait before buying a new car. If you’re able to, give yourself six months to a year to build up your credit to a point where you’ll qualify for better loans with lower interest rates.
Also, some financial institutions offer products such as credit builder loans and secured credit cards, which are designed to help individuals build up their credit. Be sure to ask your financial institution about them.
Another way to build credit is to become an authorized user on another person’s card, say your spouse or a parent.
If you must wait for credit
As mentioned, if you’re able to wait before buying, do so. Make payments on time, keep debts low and build up that credit!
When you start thinking about a car loan, determine a budget and stick to what you can afford. Also, look to prequalify for a car loan. This will give you a decent idea of what kind of interest rates you’ll see in loan offers based on your credit score.
Best of all, a prequalified loan offer—as opposed to a preapproved loan offer—won’t negatively affect your credit score.
Key Takeaway Sometimes, waiting to buy a car until you have built up your credit is the best (and the most affordable) option.
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