What do you do if you need a car but don’t have the track record to make a dealer confident you’ll be able to repay a car loan?
Phil Reed, senior consumer advice editor for consumer auto site Edmunds.com, said a surprising number of people who aren’t sure of the answer to that question go to dealerships and essentially say, “Hi, I have no credit, and I want to buy a car.” He doesn’t recommend this approach.
Instead, he suggests trying to get pre-approved for a loan before walking through the door, which could be more complicated than it seems. “You have to choose the right car and the right amount [to borrow],” he said. What you’re looking for is reliable transportation you can afford. So your initial shopping efforts might start at your computer. There are lenders that will work with borrowers who have no credit. You just need to go out and find them.
If you have a relationship with a bank or credit union, Reed recommends starting there to look for financing. Particularly if you have a thin, or nonexistent, credit file, he advises trying to get an in-person appointment. Make sure to bring pay stubs and bank account records with you. “Make a case for yourself,” he said. Edmunds.com recommends putting at least 10% down on a used car. In addition to reducing the amount you’ll need to borrow, the larger down payment shows the lender some commitment on your part. A trade-in could also be used as a down payment, Reed notes. We also advise checking your credit reports, if they exist, and credit scores. You want to know as much about your credit profile as a lender would.
Reed said that even though a dealership may be able to beat an offer from your bank or credit union, if you have that loan approval, you needn’t worry about whether you can get approved. You already know you can be — now you can compare rates or negotiate as a cash buyer, focusing more on price. You don’t want to feel so indebted to the dealer for “giving” you a loan that you fail to negotiate the price of the car, he said. If the dealer’s financing isn’t better than the bank’s, you still have an approval in your pocket.
It’s also important to be confident a car is affordable for you even if it’s not the car you’d choose if you had more money and better credit. “If you have no credit, it’s not the time to get your dream car,” Reed said. “You can move up later.” Sites like Kelley Blue Book, Cars.com and Edmunds can help you find information on the cars that match your budget. When you’re at the car dealership, remember your budget, and don’t spring for optional add-ons you really don’t need.
He also cautioned that the interest rate you’re offered may seem appallingly high, but that may be part of the cost of not having any credit history. He said if a car buyer is paying on time and building credit, refinancing is a possibility. A former dealership employee told Reed he once saw a customer decrease his interest rate from 13% to 2% in two years’ time by improving his credit and refinancing. (You can check your credit scores for free every month on Credit.com to track your credit-building progress.)
The opportunity to build credit is one reason Reed advises biting the bullet and paying a higher interest rate over getting a cosigner. Cosigning will involve checking someone else’s credit and using that score to qualify for a loan (it might get you a lower rate—or might not, depending on their credit score). Having a cosigner will tie that person’s credit profile to the way you repay your car loan. Reed said if you’re going to do it, it’s pretty much a last resort, and the cosigner should be a relative. Bottom line, though: “It’s asking a lot.”
It’s better, Phil Reed said, to finance the car yourself and pay on time, which will help build your credit. That way, you won’t have to worry about whether you’ll qualify for a loan next time.
More on Auto Loans:
- Are There Car Loans for People With Bad Credit?
- What to Do If You Can’t Make Your Car Payments
- Top 5 Worst Car Buying Mistakes
Hannah Maluth contributed to this article. This article has been updated. It was originally published April 7, 2015.