Typically only teens and college students have to deal with the problem of trying to secure a car loan with no credit, but it can also happen to adults. Having no credit means that there is not a record of previous loans being repaid or a history of paying major utility bills on time. Good credit takes time to build, in most cases several years, and it is not always possible to wait that long to take out a car loan. Thankfully it is possible to get a car loan, even with no past credit history, and potential borrowers can even avoid significantly higher interest rates.

Even with no credit consumers can still find lenders willing to offer them a car loan, but there are a few important aspects to consider before signing on the dotted line. Interest rates are often higher for consumers with no credit, and some lenders might require additional proof of the borrower’s ability to pay back the loan on time. In this guide consumers will find the information they need to find and be approved for a car loan that will also help them start building a strong credit history.

Car loans have been around since the early 1900’s when the first automobiles started rolling off the assembly line. As soon as Henry Ford realized his dream of producing cars that middle class America could afford, financial institutions began offering loans. Many of these initial loans were made to citizens who had absolutely no credit history which prompted the Federal Reserve in 1920 to warn banks “do not offer financing for automobiles used for pleasure”.

While the Federal Reserve was worried that the large number of loans being made to consumers that might not be able to repay could cause the financial system to collapse, an article in the Willmar Tribune published in July of 1920 countered the Fed’s warning with a statement of its own. Citing the right to pursue happiness as promised in the Declaration of Independence as evidence that owning an automobile was an inalienable right, banks continued to offer loans to their clients with no credit.

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• A Look Back At The History Of Auto Financing

No credit loans have been a standard in the automobile industry since 1919, thanks to an inventive strategy developed by General Motors (GM) president Alfred P. Sloan. While Henry Ford may have made the Model-T relatively inexpensive, it was still out of the reach of most middle class Americans and the only way they could afford one was to pay in installments. While Henry Ford initially had a plan that had consumers deposit money at the dealership until a set amount had been reached, GM took this one step further.

Alfred P. Sloan and the executives at General Motors created GMAC, and became the first dealership to offer car loans to consumers with no credit. While the majority of these loans required a 35 percent down payment before being approved, it did help more Americans realize their dreams of owning their own car. These no credit car loans helped propel GM to the front of the industry, and it was able to maintain its status until the Ford Motor Company finally began offering its own in 1928. By the mid 1930’s it wasn’t only cars that Americans were purchasing on credit but other appliances and home goods as well.

Reference:

• The American Dream and Consumer Credit

It is not uncommon for teens and even adults to not give a lot of thought to their credit history until they need one. A strong credit history is important when it is time to buy a house or sometimes even have a major utility bill placed in their name. It is not uncommon for electric companies to request a credit report before turning the lights on, and the same can also be true for water and gas. Consumers with no credit history often have to have a down payment ready simply to have their utilities connected, which can be difficult to do. Since most consumers with no credit are teens and college students money is typically tight, and finding the extra necessary for down payments can be difficult.

While it does take years to achieve a good credit score, one of the best places to start is with a major purchase. Since a vehicle, whether it is new or used, is considered an investment once the loan is repaid it can have a significant effect on a credit report. Having good credit will make it easier to have utilities connected, which will also result in a stronger history. Home buying and even refinancing, when needed, will also be less stressful and expensive simply by being approved for a no credit car loan.

It is important to note that strong credit is only built when the car loan is paid off on time. Late payments will hurt credit history and if the vehicle is reposed it could result in damage that will take years to fix. A good tip to remember:

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• No Credit History? Yes, You Can Still Buy a Car

No credit loans might sound relatively simple and straightforward. Consumers simply agree to pay a set amount each month until the loan is paid off by a prearranged date. While this is the basic premise of a no credit auto loan, there is a little more involved on the consumer’s and financial institution’s side.

Loans made by family or friends are not applicable, and current college students cannot count their financial debt as proof of their financial responsibility.

In some cases large amounts of student debt can actually make it more difficult to be approved for a no credit car loan, especially if the date to start repaying is near. In this case the student debt will be factored into the client’s potential ability to pay. Past and present work history can help improve a borrower’s chances of being approved, especially if the buyer is still in school. No credit car loans do come with higher interest rates, and this is something that can be rarely avoided. Without being able to show that previous loans were repaid on time, no credit borrower’s are considered a higher risk. There will also be a down payment required, and while it won’t be as high as the 35 percent that was charged in the 1920’s, it will still be larger than those with a good credit history.

Once credit has been established, the next car loan should come with lower interest rates. The vehicle that was just purchased can also be used as equity for the next car loan, which will often negate the necessity of coming up with a down payment. Establishing credit takes time, and occasionally money, but it is worth it in the long run.

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• Tips for First Time Car Buyers

Regardless of the type of car loan it is always recommended that consumers check their credit scores. Mistakes on the report can be made by the various agencies, and it is important to catch and fix them before applying for car loan. There are three main credit bureaus that financial institutions check with, Experian, TransUnion and Equifax. Even though these bureaus use different methods to compile a credit score the numbers mean the same thing.

This typically results in higher interest rates that can cause the overall price of the vehicle to almost double. In some cases this financial headache could have been avoided simply by keeping track of credit scores. While most teens will not be affected by mistakes on their FICO scores, unless their identity has been comprised, it could be different for some college students. Almost every college student has some type of student loan, and this will show up on all three credit reports. Financial lending institutions will also see the pending loan payments, which will be factored into the approval process.

One of the common problems college students find with their credit scores is improper reporting of their loans. The majority of students often combine their loans, especially when their graduation date is nearing. Consolidating student loans not only make it easier to keep track of payment due dates, in some cases it can also lower their accumulated debt. If there are errors in the report FICO scores can drop, even before the student has had a chance to start building a strong credit history. When this happens FICO scores can drop below zero, and this will have an extremely negative effect on any chances of being approved for a no credit car loan.

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• No Credit History? You Can Still Buy a Car

But first consumers need to know what is included. It might be a little confusing trying to figure out how there is a score without having any past open lines of credit, but it generally starts with your first paycheck. Once you have joined the workforce and are at least paying federal taxes you have a credit score. Chances are it will be below 500, which will put you in the “no credit” category, but this is typically how everyone starts.

Past and present work history is always factored into the FICO score, and this can be crucial for teens and young adults. Changing jobs every few months will hurt credit scores, and can make it difficult to even start to build a strong history. When proof of previous payments is lacking financial institutions typically look at a consumer’s potential ability to pay, and this is where employment history becomes important. If you frequently change jobs in a relatively short period of time it can indicate to potential lenders that you are not reliable. Since 2008 banks have implemented more stringent requirements in order to be approved for any type of loan, and this especially applies to anyone with no credit.

Without a strong work history it is difficult to show that you have the ability to pay, even if you are able to meet the requirements for a down payment at that time. College students also want to be careful of opening any lines of credit while in school, since this can also adversely affect overall credit scores. It is common practice for credit card companies to flood students with offers, but in the long run this can hurt FICO scores instead of improving. High interest rates with these cards are common, and when these payments are calculated in with the ones for the no credit car loan many students find that it is impossible to keep both accounts current. This can result in the late payments and even repossession that can make it almost impossible to ever have good credit.

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• How to Buy a Car With Low or No Credit

There are costs associated with any type of loan, especially made to someone with no credit. While these additional costs can seem unfair, simply remember that a financial institution was willing to take a chance on you and that the next time the additional fees will be much lower. In the meantime while you are working on building a strong credit history you need to factor in some of the costs that will be included with the no credit loan. This will obviously include the total amount of the loan, along with the monthly interest rates and the initial down payment. While there are a very few occasions where a down payment wasn’t required, this is definitely not something that you want to depend on.

Interest rates will vary, sometimes dramatically, depending on where the loan originated from. Jack Nerad, the executive editorial director for Kelley Blue Book suggests carefully looking at all of your options before settling on a loan with an extremely high interest rate. Credit unions and federally insured banks generally have the best interest rates, and if you can meet the sometimes strict requirements this is often the most affordable option. Pay lots also offer financing for buyers with no credit, but it should be noted that the interest rates can be as much as three or four times higher than those offered by banks.

The cost of insurance is another important and necessary consideration, especially since most institutions will not approve a loan without proof of insurance. While all 50 states only require drivers to carry liability insurance which only covers damage to another person’s vehicle, this might not be an option with a no credit car loan. In most cases lending institutions will require you to show proof of full coverage, which is significantly higher than just having liability. While this does cover your vehicle and the other driver’s (if the accident was your fault) the higher cost of the insurance can affect your ability to make the loan payments on time. Other costs associated with the no credit auto loan will also include gas, necessary routine maintenance, along with license, inspection and registration fees.

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• How to Buy a Car With Low or No Credit

It is not uncommon for potential first time automobile buyers with no credit to need a co-signer to help them get approved for a car loan. This is especially true for teens who are also dealing with the problem of having little or no work history. In generally most teens cannot afford the cost of owning a car or truck, even one that is gently used. Pre-owned vehicles are often a less expensive choice for first time teen buyers, but it is still difficult for them to convince a bank or dealership that they are a low risk loan applicant.

While it is important to note that a co-signer cannot carry the vehicle’s insurance, it must include the driver’s name on the policy, he can take responsibility for the entire amount of the no credit loan. Another aspect to take into consideration is that this also means that the repayment of the loan will be noted on the co-signer’s credit report, which does little to help your own FICO score.

Some of the aspects to look for in a co-signer include their own strong FICO score, along with an ability to show past work history. If the co-signer already has a good relationship with a bank or credit union you might even be able to benefit from lower interest rates. Even though there are some cons associated with having a co-signer, being able to drive away in a vehicle of your choice generally outweighs the negatives. Just remember to repay the no credit loan on time so the co-signer is not left with costly fines and penalties.

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• Beginner’s Guide to Car Loan Hunting

Even with a co-signer you will still need to gather together a few essential documents before you sit down with a potential lender. Having all of the necessary paperwork already organized also indicates to the bank that you are mature and ready to accept the financial responsibility associated with a no credit car loan. Along with the documents needed by the co-signer, if applicable in your situation, you will need to provide proof of employment in order to show your ability to repay the loan in a timely manner.

No credit car loans also require a list of four to six references, along with proof of enrollment in school (also if applicable). All copies of your credit report, preferably from the three main agencies. As previously mentioned everyone has a FICO credit score once they are gainfully employed and paying taxes. Kelley Blue Book executives also suggest bring proof of insurance to the initial loan meeting, since it will be required before the final approval is allowed to go through.

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• No Credit History? You Can Still Buy a Car

Unfortunately scams involving auto loans are fairly common, especially for buyers with no credit. One of the most common scams to be wary off involves the dealership, which is another reason it is recommended that the no credit loan be secured through a FDIC bank or credit union. Commonly referred to as a “straw purchase” the dealership will “erroneously” have the co-signers initial on the wrong line. This effectively removes you from the loan, along with ownership of the car. It is commonly done to ensure that the loan application is approved but not only is this practice unscrupulous, it is also illegal. Both parties must sign the loan application.

Another scam to watch out for involves the dealership being allowed to enter in your income. While this will help the loan be approved, it is also illegal and could end up costing you additional money in penalties.

Reference:

• Tips for First Time Car Buyers