Your credit history determines a lot of things, including whether you can buy a car. Banks like to see that you have a history of financial responsibility before lending you a large sum of money to buy a car. Does that mean if you don’t have a history that you are out of luck?
Luckily, there is still a way for you buy the car you’ve always wanted.
Save Money for a Down Payment
Before lenders give you a loan, they want to know how much of your own money you will have invested in the vehicle. You are a much lower risk of default when you have your own money invested in the car. For example, let’s say you want to buy a $20,000 car. You have $8,000 to put down on the car and need to borrow the remaining $12,000. Investing your own $8,000 gives lenders reassurance that you’ll make your payments rather than default. If you default long enough, you run the risk of the bank repossessing your car.
Now, what if you borrowed the full $20,000 and didn’t put any money down on the car? There isn’t a lot of incentive for you to pay the loan if you meet with financial distress. You won’t lose any of your own money with the exception of the total payments you’ve made thus far. The risk of default, in this case, is higher, which may mean no car loan.
Find a Cosigner
Your best chance of getting a car loan approval with a limited credit history is finding a cosigner with good credit. When there is more than one borrower on the loan, the lender has a better chance of securing payments. The cosigner takes on the obligation of the loan just as much as you do as the main borrower. If you stop making your payments, the lender can go after the cosigner.
Try a Credit Union if You Have Limited Credit History
Credit unions often have more flexible guidelines. They also tend to rely less on automated approvals and listen to your story. In other words, they put a human element to financing a car. A loan officer will discuss your situation with you.
If you have a reason for your limited credit history, such as you just began working a full-time job out of college or you just didn’t want to put yourself into any type of credit card debt, explain it. Let the credit union know the story behind your credit scores or lack thereof. Because they are a local lender and member-owned, you may have a better chance of securing the loan you need.
Build up Your Credit History
If none of these options work for you, take a break and start building up your credit history. You can take the simple steps below to get the history that you need:
- Apply for department store credit cards – Use them to charge normal purchases and pay them off in full.
- Apply for secured credit cards – A secured credit card gives you a credit limit equal to the down payment you make on the card. Again, pay the balance in full to show financial responsibility.
- Apply for a personal loan – A personal loan isn’t revolving debt and can give you the mixture of credit you need to perfect your credit score. Make sure you make your payments on time.
Buying a car with a limited credit history could be a little more difficult for you, but it’s not impossible. Try thinking outside of the box as you figure out the best option for you. Unless you have cash to pay for the car in full, you’ll have to shop around until you find a lender willing to work with your situation.