Winter storms across Texas temporarily delayed auto refinance loan processing, but applications largely remained steady — except in Texas. Last week, millions of Texans endured subfreezing winter weather that resulted in power grid failures, water outages, dangerous road conditions, among other infrastructure failures. Since temperatures started to rise over…
It can be a challenge to buy a car without credit or a cosigner, but you’re not without options.
Let’s be honest: Not everyone has a stellar credit history. In fact, some people have no credit, particularly if they’re just getting started in life and hoping to become a first-time borrower with the purchase of a new or used car.
For some, it’s possible to overcome a lack of credit by recruiting a cosigner, but what if you don’t know anyone willing to cosign a loan with you? With no credit and no cosigner, can you even buy a car?
Sure… but you need to be smart about it.
Why Credit Matters When Car Shopping
When a lender or finance company offers you a loan, they want some degree of reassurance that you’ll fulfill your obligations by paying back the loan amount and interest within the agreed-upon length of time, or loan term.
Your credit reflects your track record of how well and often you take on and pay down debt, such as student and car loans, mortgages, and credit card balances.
Being responsible with your debt correlates to a more positive credit history and report. In contrast, failing to pay down your debt as agreed negatively impacts your creditworthiness, making you a riskier borrower in the eyes of banks, credit unions, and other lenders.
Factors that contribute to your credit score
Your credit score and overall credit history are made up of multiple factors that, together, give lenders a reasonable idea as to how risky a borrower you would be.
In other words, the better these factors are, the more likely you’ll be approved for an auto loan.
Your credit report records your:
- Payment history: how often you pay your bills on time, as well as any late or missed payments
- Amount of debt you owe: the total balance you owe on any loans, mortgages, credit cards, and other obligations
- Length of credit history: the length of time you’ve had some form of credit
- New credit: how often you’re applying for or looking for new sources of credit
- Types of credit: the mix of credit obligations you owe
What Do Auto Lenders Look At When You Have No Credit?
If you don’t have credit, finance companies need to consider other variables before offering you a car loan — if they do at all — including your:
- Employment and employment history: consistent and stable employment demonstrates your ability to pay on your loan
- Income: how your income stacks up against the debt you’d incur by taking out a car loan
- Collateral: the vehicle you’re hoping to buy (which could be seized and resold in the event you stopped paying the loan)
- Down payment: how much money you’re putting toward the car purchase before the loan comes into play
- Current assets: your savings and investments, which could be used in a pinch if your income were to evaporate — demonstrating you could still pay down your loan
- Desired loan term: the longer a loan term, the more interest you pay and the higher a chance of something happening that would impact your ability to fulfill your loan obligations
Since credit history serves as proof of your ability to pay a car loan, you need to provide that proof through other means when you have no credit and still want to buy a car.
When Do You Need a Cosigner to Buy a Car?
One of the simplest methods of buying a car with no credit is to enlist the help of a cosigner.
A cosigner is a person, such as a family member, who agrees to be responsible for the loan in the event you stop or otherwise can’t continue paying it. At the same time, a cosigner isn’t the same as a co-borrower; the loan isn’t theirs, and they don’t own the asset purchased with the loan (your car).
By applying for a car loan with a cosigner, the bank will more heavily weigh your cosigner’s credit history. If the cosigner has good credit, your chances of getting the loan increase because the lender’s risk decreases.
How to Buy a Car With Little to No Credit and No Cosigner
Unfortunately, it’s not always possible to find a cosigner. At the same time, nearly everyone needs a car, regardless of creditworthiness.
It’s difficult to buy a car with no credit and no cosigner, but it’s not impossible. All it takes is a little planning, effort, and patience.
It’s likely not the advice you want to hear, but the best way to buy a car with no credit is to buy one in cash. Even if it’s a beater held together by a MacGyver-esque combination of duct tape and straps, a car of your own is sometimes better than no car at all.
Your income influences how likely and easy it is for you to meet your debt obligations. By increasing your income — especially relevant to your expenses — you’re reducing the risk you present to the lender. A small raise or promotion can’t hurt your chances of buying a car, whether you go from flipping burgers to managing the joint or get named top salesperson of the year. Higher income is always better.
If you’re self-employed, you’ll also need to prove your financial stability, even with a high credit score. Be prepared to provide your tax statements from the last two years as proof of income. Lenders want to feel confident about your ability to pay back the loan. Earning more can’t hurt.
Increase your down payment
Putting money down toward a vehicle purchase reduces a lender’s risk when offering you a loan. In turn, you may qualify for a loan despite having little or no credit — and without a cosigner. Lenders may also offer you more favorable repayment terms, such as a lower interest rate, saving you money overall.
Just how much should you put down on a car purchase when you have no credit? The common suggestion is to aim for 20%, but that’s not always feasible. Try to put down as much as you reasonably can, but remember: Any percentage greater than zero is a boon to you and your situation.
Down payments also reduce your loan-to-value ratio (LTV) which measures the car loan’s balance vs. the car’s value. The lower your LTV, the better. If your car (collateral) is worth more than your auto loan balance, that means you have positive equity. A lower LTV can make it easier to refinance into a more favorable loan in the future, when your credit has improved and you can get a lower interest rate.
Car (LTV) Loan-to-Value Calculator
Establish your credit
By default, everyone begins life with zero credit. Unless you’re a baby armed with a credit card or you’re given a small loan of a million dollars, you’ve gotta start somewhere. Fortunately, it’s pretty simple to establish your credit, though good credit habits are necessary to build credit.
Secured credit cards, like secured loans, are credit cards that require you to make a refundable deposit before getting issued. Because secured credit cards function like regular unsecured credit cards, they report payment activity and history to the credit bureaus. By making on-time payments toward your card’s balance, you’ll begin to build and improve your credit.
Student credit cards are credit cards aimed at students. Student credit cards are typically unsecured, but prevent you from going too spend-crazy by enforcing lower credit limits than you’d find on a regular unsecured card. Still, a consistent on-time payment history can help you build and improve credit to eventually qualify for a car loan.
Store cards typically carry higher interest rates and lower credit limits than regular unsecured cards, making them easier to qualify for. However, they may be restricted for use only in a specific store or group of stores. As with other cards, payments made toward the balance of a store card impact your credit.
Authorized users are given permission to use someone else’s credit card to make purchases, but aren’t responsible for paying the bill and can’t increase the card’s limit. However, if a cardholder with good credit adds you on as an authorized user, you may be able to double-dip on their good credit habits to grow and build your own credit history.
Credit builder loans are loans that you pay on before receiving the borrowed funds. When you take out a CBL, the lender moves the funds into an escrow account and releases them when you’ve satisfied the loan’s terms. At the same time, payments made toward the loan are reflected on your credit report.
Use alternative data
Most people have some combination of phone bills, streaming subscriptions, rent, and utility bills, even if they don’t have debt. Except in cases of delinquency, these accounts aren’t recorded on your credit history.
Which isn’t really fair, especially if you’re a responsible bill-payer.
Such services scan your checking and savings accounts to track payments you’ve made toward your bills. This information is then reported to the relevant credit bureaus to demonstrate a positive payment history.
However, using alternative data doesn’t guarantee a boost to your credit, nor is it guaranteed to be reflected on the specific credit report and score used by a would-be lender. Still, it’s a viable means of boosting your score without any downsides.
Shop around at different lenders
Just because one financial institution turns down your loan application for lack of credit doesn’t mean all lenders will. Some may have less strict requirements or be more understanding of your goals and financial situation.
Try shopping around at different lenders to see which are willing to work with you. Though there’s no guarantee this will work depending on what car you’re trying to buy and your specific finances, it’s worth seeing what options are available to you.
In many cases, it’s easier to qualify for a loan at a credit union vs. a bank or other finance company. Credit unions are more community-oriented and willing to work with you to find a solution as opposed to treating you like just another customer.
Try peer-to-peer lending
Peer-to-peer, or marketplace lending, matches borrowers with lenders via online platforms or marketplaces. Each market or broker specifies its acceptable credit ranges. Some will require you to have a strong credit history and good credit score, whereas others will allow you to qualify with bad or no credit.
As with traditional lending, shop around on various P2P lending platforms to see what’s available to you.
Get lending assistance
As in the case of your local credit union, local community services, nonprofits, and military organizations may be able to help you buy a car with no credit and no cosigner.
Search for local nonprofits, charities, and churches that provide assistance and guidance for buying a car without any credit. Assistance is commonly provided through a loan for those below a certain income level or borrowers with bad credit. In other cases, grants may be made available to those looking for a car but otherwise unable to afford one.
Active duty and retired service members may be able to take out a military car loan. Military car loans are designed to be easier to qualify for by those with little to no credit, and often have more favorable rates and terms than other comparable auto loans.
Consider dealer financing
Many car dealerships offer dealer financing, especially to those buyers with no credit. Be wary, however: Dealer financing isn’t always the best solution and such loans can include high interest rates, but it could be your only option for getting a loan without credit or a cosigner.
Make sure any dealer financing is fully approved before you leave, otherwise the deal’s not final.
Avoid “buy here, pay here” loans if at all possible, especially from non-reputable car dealers (keep reading for why that is).
Types of Car Loans to Avoid if You Have Little to No Credit
Trying to buy a car with no credit and no cosigner can often lead you to certain unscrupulous lenders looking to take advantage of your situation. Additionally, some types of loans are structured in a way to almost guarantee your ability to qualify, but come with the trade-off of exorbitant interest rates or punishing terms.
Buy here, pay here loans
Where dealer financing takes into account your credit score and history, buy here, pay here loans don’t — which is why they’re also called “no credit check loans.”
Reputable car dealerships that offer auto financing options don’t finance your loan directly. Instead, they serve as middlemen for a network of traditional lenders in exchange for a portion of the loan’s interest rate. That’s all fine and dandy. Your details are still evaluated by finance companies that, in turn, offer you the loan through the dealer. It may not be the best loan, but it’s not necessarily one that takes advantage of you.
Buy here, pay here, or BHPH, loans are a type of predatory loan that often overvalues the car’s worth and applies a high interest rate onto the loan. This results in you paying significantly more in interest than you would with a regular loan. BHPH loans may also increase the likelihood your loan starts out underwater or upside-down.
Subprime auto loans
Credit scores are grouped into different categories depending on the strength of the score. Borrowers with bad or limited credit history are typically grouped into the “subprime” or “deep subprime” ranges, indicating that they pose a high risk to lenders.
However, some auto lenders are more than happy to offer loans to those with poor credit. These loans, called subprime auto loans, have high interest rates and an assortment of fees.
Refinancing an Auto Loan With Bad or No Credit
If you initially took out a car loan with no credit and no cosigner, chances are it’s not the greatest loan in the world. That’s a-okay. Depending on your credit profile, it’s probably helped form the basis of your credit history, especially if you’ve been good about paying the loan on time.
During a refinance, your new lender pays off your existing loan and provides you with a new one, complete with a new interest rate, loan term, and monthly payment. For these reasons, refinancing is a wise choice if you’ve improved your credit or want to get out of a bad loan.
However, qualifying for a refinance emphasizes the importance of avoiding predatory loans and a high debt-to-income, or DTI, ratio. DTI is a measure of your monthly debt obligation vs. your gross monthly income.
Lenders don’t always take your DTI into account when you first finance a vehicle. However, lenders may cap the maximum acceptable DTI ratio when you try to refinance that loan. That cap varies from lender to lender, but you’ll likely have a difficult time qualifying for a refinance if your DTI exceeds 50%.
(DTI) Debt-to-Income Ratio Calculator
So, what do you do if your DTI is that high? Unless you can find a lender who’ll offer you a refinance at decent terms, your best bet is to continue paying down your debt, even if it means dealing with a bad loan for a while.
As long as you continue to make on-time payments and practice other good credit habits, your DTI will decrease to a level where you qualify for a refinance and, ultimately, better loan terms.
It’s Not Impossible to Buy a Car With No Credit and No Cosigner
Building a solid credit history is a life-long process and your lack of credit — or lack of good credit — isn’t anything to be ashamed of. Though you may face some frustrations and difficulties when buying a car with no credit and without a willing cosigner, you’re not without options.
By saving money, increasing your income, and shopping around for the best deal, you’ll lay the foundation to establish a good credit history. At the same time, you’ll progress toward buying a vehicle.