Having no credit doesn't always mean a “no” from an auto lender! As a brand-new borrower, you have more options than you think for getting your first car loan.
No Credit vs. Bad Credit
When you have no credit, it usually means your credit score isn’t the best. This is simply because lenders have no proof that you can successfully repay borrowed money, and your credit score can be thought of as a grade based on your credit history.
However, no credit isn’t exactly synonymous with bad credit. Your score may be considered “bad” in terms of where it falls on the range, but your credit history likely doesn’t have missed or late payments, repossessions, or bankruptcies – because you’re a brand-new borrower!
Getting approved for an auto loan with bad credit due mismanaging your finances or defaulting on previous loans is usually harder for a borrower to overcome than simply having a lower credit score due to a lack of credit history.
Lenders can see your credit score, and your lack of a credit history, so they understand why your score is less than stellar. Due to this, you typically have three main first-time car buying options to consider.
Option 1: Your Credit Union or Bank
If you’re a member of a credit union or bank, and your accounts are in good shape, you may have some luck getting approved for an auto loan through your financial institution. Generally, the longer you’ve been a member, the better your chances of being considered for a car loan.
Credit unions are known to be a little less strict about credit scores since they’re not-for-profit organizations that are member-owned. If you haven’t tried your credit union for your first auto loan, start there first. The worst they can say is no.
Option 2: Find a Cosigner
Another common option for first-time borrowers is enlisting a cosigner to help increase your chances of car loan approval. A cosigner helps by "lending" you their good credit score and agreeing to pay for your auto loan in case you can’t. This lowers your chance of defaulting on the loan, which increases your chances of lender approval.
A cosigner is typically a parent, a family member, or, occasionally, a close friend. The two most important things to keep in mind when you’re looking for a cosigner are: 1) they must have a good credit score, and 2) they have enough available income to cover your car loan payments.
Additionally, a cosigner’s credit score is either positively or negatively impacted, depending on how you handle the loan. When you ask someone to cosign, let them know the risks and assure them that you can handle the auto loan, since their good credit score is on the line!
Option 3: Subprime Auto Loans
Since first-time borrowers are usually in the lower end of the credit score spectrum, a subprime auto loan could be for you. Subprime lenders work through a dealership’s special finance department, and since they specialize in bad credit borrowers, they look at more than just your credit score to make a loan decision.
This means looking at your income, debt to income and payment to income ratios, residence stability, work history, down payment amount, and more to help get a bigger picture of you as a borrower.
As a new borrower with a less than perfect credit score, expect to need a down payment of at least $1,000 or 10% of the vehicle’s selling price when you're seeking a subprime car loan. You have a thin credit file, which means lenders are unsure of how you can handle repaying loans – so lenders ask for some skin in the game.
Prepping for Your First Car Loan
No matter which option you choose (or even if you try them all) some common items that traditional lenders and subprime lenders may ask of you include:
- Proof of income – Computer-generated check stub, showing year-to-date income
- Proof of residence – Recent utility bill in your name with your current address
- Proof of identity – A valid driver’s license with current address
- Proof of phone – A bill for a working contract cell phone or landline phone
- Personal references – A list of around five to eight personal references with complete contact information
Your lender may require more or less items; lender stipulations and borrowers’ individual situations vary. But as a general rule, lenders require a steady work history, a steady income, and a down payment when it comes to new credit borrowers.
Ready to Find a Dealership Near You?
Now that you’re prepared with the basics of being a new borrower in the world of auto financing, you can start looking for a dealer and lender to work with. While we have you here, why not start with us?
Here at The Car Connection, we match borrowers to dealerships with lending options that suit their personal needs. To get connected to a dealer in your area, fill out our free car loan request form. It's secure, quick, and there’s never an obligation to buy anything. Let’s get to work!