While having no credit can make getting a car loan more difficult, new borrowers have to start somewhere! We cover tips for no credit borrowers who are hoping to start their credit history with an auto loan.
What No Credit Means to a Lender
As a no credit borrower, you may seem risky to a traditional auto lender. Since your credit history is sparse, you haven’t yet proven you can handle loans responsibly. A minimal credit history is also known as having a thin credit file, which can lead to a lower than average credit score.
While there are a few different credit scoring models, the one most commonly used by auto lenders is the FICO model. Your FICO credit score is a three-digit number between 300 and 850. While you may have no credit, your credit score is never zero, and new borrowers don’t typically start with 300, either. If you’ve never used credit before (installment loans or revolving credit), this usually means your credit score is somewhere around the lower-middle range.
With a mid-to-lower-range score and a thin file, you may not meet a traditional lender’s credit score cutoff – even with enough income. Credit scores are largely used to gauge your creditworthiness, and without a track record, it may be hard for a lender to judge yours.
However, for an auto lender, having no credit can be better than having bad credit, and there are many ways new borrowers can establish credit history and get their credit score moving in the right direction.
Car Loans as a New Borrower
While this isn’t always an option for new borrowers, many talk to their bank or credit union about getting their first car loan. Credit unions are known for being a little more forgiving when it comes to lower credit scores. If you’re looking to talk to your credit union about getting your first car loan, it helps if you go through one where you’ve been a long-standing customer.
You can also ask someone to be a cosigner on your first auto loan. A cosigner is someone who lends you their good credit score and agrees to make the monthly car payments if you can’t. This lowers the loan risk, and may increase your chances of getting approved.
Typically a cosigner is a parent, family member, or close friend. But the biggest key is finding someone who has good credit. Without that, they can’t help you get approved for an auto loan.
Additionally, a cosigner must meet the lender’s minimum income and debt to income (DTI) ratio requirements, meaning they need enough income and enough room in their budget in case you’re unable to make the payments. It’s important to note that cosigners aren’t there to help you with the monthly payments – you also need enough income on your own to do this.
If going through your financial institution and finding a cosigner aren’t options, there are lenders that work with unique credit situations, and they’re called subprime lenders. These lenders don’t rely on just your credit score and credit history to make loan decisions; they use additional factors to determine your overall ability to complete a car loan.
Subprime Auto Loans for No Credit Borrowers
Subprime lenders, also called bad credit lenders, work through a dealership’s special finance department. They aren’t at every dealer, but they’re a great resource for borrowers in unique credit situations, including first-time car buyers.
Subprime lenders work with borrowers of many types, and use your income, residence and stability, DTI and payment to income (PTI) ratios, a down payment, and other credit factors for auto loan approvals. To meet a subprime lender’s requirements, you need a few items to prove you’re ready for a car loan.
While subprime lender requirements vary, they usually have similar guidelines. Some commonly required items are:
- A recent computer-generated check stub with year-to-date income, proving a minimum monthly income of around $1,500 to $2,000 before taxes.
- A down payment of at least $1,000 or 10% of the vehicle’s selling price (a trade-in with equity can help meet this requirement).
- A recent utility bill or bank statement in your name with your current address, to prove where you live.
- A valid driver’s license to prove your identity.
- A working phone, proven with a recent phone bill (no prepaid cell phones).
If you’re approved for financing, the down payment requirement is going to largely depend on your credit situation, and the type of car you choose. Additionally, most subprime lenders require a list of five to eight personal references with complete contact information. These references can be anyone that doesn’t live at your current address – so friends, coworkers, or family members can all fill these slots.
Find a Dealer for Your No Credit Car Loan
Your personal situation may dictate what you can qualify for with a subprime lender. But to get started, you need to find a dealership with a special finance department. We want to help with that!
Here at The Car Connection, we have a network of special finance dealers and we connect borrowers to them for free. To start your car buying journey, fill out our auto loan request form and we’ll look for a dealership in your local area.