Purchasing a new car can be an exciting event, but it can also be complicated if you need financing. Most financial institutions want someone with a solid credit history to reduce the risk of defaulting on the auto loan. However, you do have options even if you don’t have an established credit history.
When a lender says you have no credit history, it just means you have no record of having credit accounts open in your name. You may not even have a credit report or score, which are used to determine credit worthiness when extending credit to someone. To buy a new car when you have no credit history, you’ll need to try one of the following tactics.
Part 1 of 6: Find lenders who specialize in no credit
Step 1: Find the right lender. Search for lenders who accept applicants with no or limited credit history.
Step 2: Look for no-credit loans. Search online for “loans for people with no credit” or “no-credit car loans”
Step 3: Check and compare the terms. Visit the websites of the top results to find out terms such as interest rates and length of the loan
Step 4: Research some feedback about the company. Check with the Better Business Bureau to find out if complaints have been made against the companies or if they have a rating.
- Tip: Rates for applicants with no credit are often higher than for other people, but you can compare terms to get the best deal possible.
Part 2 of 6: Contact your local bank
A bank you already conduct business with through a checking or savings account may be more open to working with someone who has no previous credit history.
Step 1: Meet a lender in person. Set up a meeting with a lender rather than filling out a loan application. Talking to someone in person can help you make a good impression or understand what you need to do to be approved.
Step 2: Supply your financial records. Collect the last two paycheck stubs and the last two months of bank statements for any accounts you have.
Step 3: Reference any past loans. Have letters of references from anyone you’ve borrowed money from and your employer.
Step 4: Present yourself as a good client. Type up a formal letter detailing why you are a good credit risk and why you’ll be able to pay back your loan.
- Tip: When you treat the task of getting a car loan like a business transaction, you create a positive impression, which can help your case even if you don’t have a credit history.
Part 3 of 6: Rely on cash
Many times, lenders will allow compensating factors to override the lack of a credit history for loan approval. When you put in more of your own money, it reduces the risk for the lender.
Step 1: Add cash if you're able to. Increase the size of your down payment by adding cash to a trade-in vehicle
Step 2: Minimize the expense. Select a less expensive new model so that your down payment is a larger percentage of the total price
Step 3: Pay in cash. Save up money to pay cash for the vehicle.
- Tip: Put your money in an interest-bearing account while you save for a vehicle, so that it increases in value as you add more.
Part 4 of 6: Use a co-signer
Find someone willing to co-sign on the loan with you who already has established credit. A lender will consider their credit and ability to repay the loan along with your information.
Step 1: Pick someone you trust. Select a family member or someone you trust completely.
Step 2: Explain your plan in detail. Create a formal plan which details why you are asking them to co-sign on the loan and how you will be able to pay the loan. This helps them feel more confident about protecting their own credit.
Step 3: Consider re-financing options. Discuss options for re-financing after making payments for at least six months or a year, which would remove their name from the loan.
Step 4: Check for adequate credit. Make sure their credit is adequate and they earn enough money to cover the loan payments to get the lender’s approval.
Part 5 of 6: Ask family members to purchase the car
If you can’t get financing no matter how hard you try, you may have to ask someone else to purchase it and make payments to them. They can either get approved for financing or pay for the vehicle with cash.
Step 1: Pick the right person. Choose someone you know well to approach, preferably a family member or longtime friend.
Step 2: Figure out your price range. Have a specific vehicle or price range in mind.
Step 3: Establish your payment plan. Create a payment plan which details how much you will pay each month at a certain interest rate and for how long.
Step 4: Create and sign a proposal. If the person agrees to your proposal, create a document with all of the details included and have both of you sign.
Part 6 of 6: Establish Credit
If you don’t need a new car right away, take the time to establish a credit history. It usually takes about six months to a year for a credit report to be generated once you have at least one credit account.
Step 1: Find the right credit card. Research online to find credit cards for no credit or bad credit.
Step 2: Consider a secured credit card. This allows you to put in a deposit and be approved to an equal credit limit. In order to rebuild your credit profile, you need to get a line of credit.
- There are a few credit card companies that offer secured cards without performing any credit checks, but they usually have a higher annual fee or other caveat.
Step 3: Activate your credit card. Make a small purchase and pay off the balance to activate your credit card.
Step 4: Continue to make payments on time.
- Tip: Make sure you know the credit provider reports to the credit agencies or the account won’t help you establish a credit history. Not all of these options will work for your situation, but they are all ways you can purchase a new car even if you don’t have an established credit history. Just make sure you plan ahead and know you can afford the vehicle you’re purchasing so you don’t end up with bad credit, which can be as bad or worse than no credit history.
This article originally appeared on YourMechanic.com as How to Buy a Car When You Have No Credit History and was authored by Joyce Morse.