85.5% of new car buyers use debt to finance their purchases, and roughly 43% of them are between the ages of 25 and 54.^1,2 That car purchase will likely be the first significant credit transaction for many on the younger end of the spectrum.

As a result, some of these individuals may struggle to get financing from lenders who prefer working with more qualified borrowers. If you’re considering buying a car with no credit history, here’s what you should know to improve your chances.

Why Lenders Want To Look at Your Credit History

Lenders want to pull your credit report and look at your history because it’s one of the best tools they have for determining whether you’ll pay back future accounts, including theirs.

First, it sheds light on your behavioral tendencies. For example, if you have a track record of making expensive debt payments on time, it’s a safer bet that you’ll continue to do so.

In addition, your credit history can influence your capacity for new accounts. For example, if an auto lender discovers that you already have a significant amount of credit card debt, they’ll know that less of your paycheck is free to go toward your car loan.

Of course, history is never a perfectly accurate predictor of the future, and it’s just one variable in the underwriting equation. You can still get a car loan without a strong credit rating.

Lenders also use other factors to determine whether you qualify, including your:

• Gross income
• Employment history
• Down payment size

If you have a short or poor credit history, you may be able to make up for it by having a more competitive application in one of these other areas.

Options for Getting a Loan With No Credit

It’s possible to get a car loan with no credit history, but you’re going to have to apply more strategically than someone who is more creditworthy. Here are some of the best options for getting financing despite lacking credit.

Lenders That Work With All Credit Profiles

Each lender has different borrower profiles in mind, which means that some are more willing to lend to someone with a bad credit score than others.

If you need to buy a car with no credit history, target lenders that have shown they’re open to working with people that have less desirable credit profiles.

Unfortunately, there’s a tradeoff in these situations. Lenders who work with bad credit borrowers almost always charge higher interest rates and fees than those who cater to more qualified individuals.

Don’t be willing to accept any bad credit car loan offer that comes your way. Make sure you determine whether or not you can afford to keep up with the payments before you sign.

Get a Co-signer

One of the best options for people trying to buy a car with no credit history is to get a qualified co-signer. A co-signer literally signs the loan documents with you and is liable for the balance if you don’t pay, so they can significantly ease a lender’s concerns.

Unfortunately, you can’t just grab anyone off the street. Your co-signer should have a good credit score or a promise from them won’t mean much to your lender.

Of course, finding and convincing someone with a good credit score to be your co-signer can be difficult as they’re taking on significant risk.

The best option is usually a parental figure for young people new to credit. Those without parents to fall back on should probably start their search with other relatives or close family friends.

Credit Unions

Credit unions aren’t typically bad credit lenders. They’re traditional financial institutions with competitive interest rates, and you should expect them to have relatively rigorous qualification requirements.

However, credit unions are also less rigid in those requirements than banks. They’re non-profit organizations and focus on serving their members rather than generating returns for shareholders.

As a result, it’s easier to build a relationship with a credit union than with other lenders. They’re more likely to negotiate or consider your application despite a lack of credit history. 

To apply for financing with a credit union, you need to become a member first. There may be unique eligibility requirements, such as living in a specific area or working in a particular trade, so you’ll have to find one that suits you.

Car Dealer Financing

One of the most convenient places to get a bad credit auto loan is the car dealership where you’re trying to buy your vehicle. They usually work with multiple external lenders, some of whom may be willing to finance people with no credit history.

However, this is perhaps the most expensive option. As the facilitator of the lending transaction, dealers often mark up interest rates and take a cut. And unfortunately, having a higher interest rate on a car loan can cost a shocking amount of money.

For example, the average rate on a used car loan with a low credit score of 579 or less is 20.45%. A $30,000 subprime loan with a five-year loan term at that rate would cost you a whopping $18,141 in interest.

Use Marketplace Loans

Last but not least, prospective borrowers with little to no credit can look to marketplace loans for financing. Also known as peer-to-peer lending platforms, they can connect you with a wide variety of individual lenders.

That flexibility is the primary advantage of these platforms. Marketplace loans can help you get financing despite having a credit score that would cause a traditional financial institution to dismiss you out of hand.

However, like many alternative financing options, you’re probably going to pay a premium interest rate for the increased accessibility. You’ll likely also have to pay platform fees to benefit from its services.

How To Increase Your Chances of Getting an Auto Loan

Buying a car with no credit history is difficult, but there are steps you can take to increase your chances of qualifying for financing. Here are some of the best options to consider.

Get a Co-signer

Once again, getting a qualified co-signer to vouch for you and share the responsibility for your debt is one of the best ways to convince a lender to offer you financing despite having no credit history.

The better their credit score, the more advantageous it will be for your application. Not only can they improve your chances of getting a loan, but they can significantly impact the interest rate your lender offers you.

If you’re struggling to convince someone to become your co-signer, consider promising to remove them from the account once you’ve built up enough credit to do so. Some loans have co-signer release options, so ask your lender if that’s possible.

If it isn’t, you can still refinance into a loan without them after a year or two. That gives you plenty of time to raise your credit score, especially if your auto lender reports your payments to the bureaus.

Build Your Credit

Unfortunately, needing a car is often something you have little control over. However, if you can find alternative means of transportation or meet your needs in another way temporarily, it might be worth taking the time to build credit before applying.

Having an excellent credit score is the most reliable way of increasing your chances of qualifying for a car loan and getting a lower interest rate. It will also benefit you in the many other aspects of your life that require a good credit score.

One of the best ways to improve your score is with a credit builder loan like Credit Strong’s. We report to each major credit bureau, and our customers see a 25-point increase on average to their FICO scores after three months of timely payments!

After a year, that increase goes up to almost 70 points! That’s equivalent to an entire credit score range and could save you thousands of dollars on an auto loan. There’s no credit check to apply, so give it a try today!

Have a Steady Paycheck

Besides your credit history, your paycheck is one of the most significant determining factors in your ability to qualify for an auto loan. While that does refer to its size, it also includes its stability.

In other words, lenders want to know that your source of income is secure. They want to guard themselves against the possibility that you’ll become unable to pay your debt.

To verify the consistency of your paycheck, they’ll usually confirm that you’ve held the same job for some length of time. That period may vary between lenders, but longer is always better.

If you’ve recently transitioned from one employer to another, it can make it harder to get a car loan. However, lenders will also consider the length of your work history overall and any gaps between roles.

As you can probably guess, having a longer work history and fewer, shorter gaps between positions are generally better.

Make a Larger Down Payment

Whenever a lender finances the purchase of an asset, one of their most significant considerations is the loan-to-value (LTV) ratio. It’s equal to the size of the loan divided by the value of the asset.

For example, if you take out a $24,000 car loan to purchase a vehicle with a $20,000 retail value, your LTV ratio is 120%. The higher the LTV ratio, the more the lender stands to lose, and the greater their risk.

Remember, your asset is the collateral for your loan. If you default, lenders will try to recoup their losses by seizing the asset and selling it. If the asset value is too low compared to the loan amount, they would lose money.

As a result, auto lenders often cap the LTV ratios they’re willing to accept. If you can lower yours, you become a more attractive borrowing prospect. The easiest way to do that is by making a larger down payment.

To continue the previous example, putting down another $5,000 would reduce your LTV ratio to 95%, which would be much less risky for the lender and make them more likely to offer you financing. 

Can You Get a Car Without a Co-signer and No Credit History?

Financing a car without a co-signer and no credit history is theoretically possible, but your borrowing options are going to be significantly limited. Most traditional financial institutions probably won’t want to work with you.

As a result, you’ll probably have to apply for a loan from alternative sources, such as online marketplaces, peer-to-peer lenders, or credit unions. They may have less restrictive qualification requirements, including lower credit minimums.

If you have credit problems and no co-signer, it’s also worth considering saving up the money to buy your car outright.

For example, instead of taking on a $400 monthly payment to a bad credit car dealership, commit to saving $400 a month until you can afford to buy without a loan.

Used cars can still be expensive, but if you’re willing to get a model that’s a few years older, you can save yourself a significant amount of money and get a vehicle without worrying about your credit at all.

CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.

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