Difference between revisions of "Buy a New Car With No Credit History"
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Just because you don’t have any credit doesn’t mean that you aren’t a responsible citizen—and many lenders understand that. They just want proof that you’re good for the money. When looking for a car from a dealership, there are some steps you can take to convince both salesmen and lenders to take you on, even with a credit score of zero. | Just because you don’t have any credit doesn’t mean that you aren’t a responsible citizen—and many lenders understand that. They just want proof that you’re good for the money. When looking for a car from a dealership, there are some steps you can take to convince both salesmen and lenders to take you on, even with a credit score of zero. | ||
| − | [[Category:New Cars]] | + | [[Category: New Cars]] |
== Steps == | == Steps == | ||
===Looking at Your Finances=== | ===Looking at Your Finances=== | ||
| − | #Take stock of what you can afford. Before heading out to make a car purchase, you need to look realistically at your finances. If you have no credit history, that doesn’t mean you’re bad at paying off debts—it just means you haven’t had reason to, and creditors like to see evidence that you can pay your loans. The bigger the cash down payment, the better, because it cuts down on the total financing amount and may improve your chances of getting accepted for a loan.<ref> http://finance.youngmoney.com/wheels/auto_shopping/261_92/</ref> | + | #Take stock of what you can afford. Before heading out to make a car purchase, you need to look realistically at your finances. If you have no credit history, that doesn’t mean you’re bad at paying off debts—it just means you haven’t had reason to, and creditors like to see evidence that you can pay your loans. The bigger the cash down payment, the better, because it cuts down on the total financing amount and may improve your chances of getting accepted for a loan.<ref name="rf1"> http://finance.youngmoney.com/wheels/auto_shopping/261_92/</ref> |
#*Look at your checking account and do some budgeting. How much extra income can you take out of checking right now without negatively affecting your bills? | #*Look at your checking account and do some budgeting. How much extra income can you take out of checking right now without negatively affecting your bills? | ||
#*Look at your savings account. What money is expendable? | #*Look at your savings account. What money is expendable? | ||
| − | #*If you don’t have much available for a down payment, consider starting a strict savings plan and going car shopping again once you have more money. Lenders are more willing to take you without credit when you can pay at least 20% for the down payment.<ref> http://www.dmv.org/buy-sell/auto-loans/bad-credit-auto-loan.php</ref> | + | #*If you don’t have much available for a down payment, consider starting a strict savings plan and going car shopping again once you have more money. Lenders are more willing to take you without credit when you can pay at least 20% for the down payment.<ref name="rf2"> http://www.dmv.org/buy-sell/auto-loans/bad-credit-auto-loan.php</ref> |
#*Also consider how much you will need to set aside monthly for car insurance, gas, and maintenance. | #*Also consider how much you will need to set aside monthly for car insurance, gas, and maintenance. | ||
| − | #Pull your credit scores. It is helpful to know how lenders are going to see you before you start applying for car loans, especially without a credit history. This may seem counterintuitive if you don’t have a credit history, but you may be surprised to find things on your record. Pull your [[Read a Credit Report|credit history]] from all three of the credit bureaus—TransUnion, Experian, and Equifax.<ref>http://finance.youngmoney.com/wheels/auto_shopping/261_92/</ref> | + | #Pull your credit scores. It is helpful to know how lenders are going to see you before you start applying for car loans, especially without a credit history. This may seem counterintuitive if you don’t have a credit history, but you may be surprised to find things on your record. Pull your [[Read a Credit Report|credit history]] from all three of the credit bureaus—TransUnion, Experian, and Equifax.<ref name="rf3">http://finance.youngmoney.com/wheels/auto_shopping/261_92/</ref> |
| − | #*You can [[Check Your Credit Score|find your credit reports]] in several ways. On the bureau websites, they charge about $40 for a one-time check of all three reports and your credit score, but a law called the Fair Credit Reporting Act requires that the bureaus give you a free report once every 12 months.<ref>https://www.consumer.ftc.gov/articles/0155-free-credit-reports</ref> You can also inquire about a free credit report from your bank. | + | #*You can [[Check Your Credit Score|find your credit reports]] in several ways. On the bureau websites, they charge about $40 for a one-time check of all three reports and your credit score, but a law called the Fair Credit Reporting Act requires that the bureaus give you a free report once every 12 months.<ref name="rf4">https://www.consumer.ftc.gov/articles/0155-free-credit-reports</ref> You can also inquire about a free credit report from your bank. |
| − | #*Mistakes on your credit history can affect your interest rate and whether or not you get accepted for a loan, and you can [[Dispute Credit Report Errors|dispute these mistakes]].<ref>http://money.usnews.com/money/personal-finance/articles/2014/09/04/how-to-buy-a-car-with-low-or-no-credit</ref> You should submit your disputes in writing to the credit bureaus.<ref>https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports</ref> | + | #*Mistakes on your credit history can affect your interest rate and whether or not you get accepted for a loan, and you can [[Dispute Credit Report Errors|dispute these mistakes]].<ref name="rf5">http://money.usnews.com/money/personal-finance/articles/2014/09/04/how-to-buy-a-car-with-low-or-no-credit</ref> You should submit your disputes in writing to the credit bureaus.<ref name="rf6">https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports</ref> |
| − | #Open a credit account. Opening a credit account as soon as you decide you want to take out a car loan will help your credit score if you have no history. For example, a secured credit card is useful because it doesn’t require a credit history to apply for.<ref>https://www.nerdwallet.com/blog/credit-score/zero-fico-score/</ref> | + | #Open a credit account. Opening a credit account as soon as you decide you want to take out a car loan will help your credit score if you have no history. For example, a secured credit card is useful because it doesn’t require a credit history to apply for.<ref name="rf7">https://www.nerdwallet.com/blog/credit-score/zero-fico-score/</ref> |
#*Bring documentation of this credit card to lenders when applying for a car loan. | #*Bring documentation of this credit card to lenders when applying for a car loan. | ||
| − | #Investigate credit insurance. You can purchase [[Understand Credit Insurance|credit insurance]] specifically for covering your loan in a loss of income situation. Credit insurance covers your payments, either partially or in full, in the event that you are unable to pay your loan. This can help protect your credit score against events beyond your control. Credit life insurance, disability insurance, and property insurance are all options available to consumers.<ref>http://www.consumerfinance.gov/askcfpb/799/my-dealer-offered-me-credit-insurance-what-it.html</ref> A lender may feel more comfortable extending you a loan if they know you are willing to cover it in an emergency. | + | #Investigate credit insurance. You can purchase [[Understand Credit Insurance|credit insurance]] specifically for covering your loan in a loss of income situation. Credit insurance covers your payments, either partially or in full, in the event that you are unable to pay your loan. This can help protect your credit score against events beyond your control. Credit life insurance, disability insurance, and property insurance are all options available to consumers.<ref name="rf8">http://www.consumerfinance.gov/askcfpb/799/my-dealer-offered-me-credit-insurance-what-it.html</ref> A lender may feel more comfortable extending you a loan if they know you are willing to cover it in an emergency. |
#*Consider the monthly cost of these types of insurance. It can be expensive. | #*Consider the monthly cost of these types of insurance. It can be expensive. | ||
#Determine if you can afford extras. At the end of the car buying experience, you will be asked if you want to tack on extra expenses like extended warranties and payment protection plans. Make sure you know how much these kinds of extras cost, how much help they are, and if you can afford them. | #Determine if you can afford extras. At the end of the car buying experience, you will be asked if you want to tack on extra expenses like extended warranties and payment protection plans. Make sure you know how much these kinds of extras cost, how much help they are, and if you can afford them. | ||
| − | #*Extended car warranties can ensure you don’t have to pay for big repairs. The flip-side of this is an extra expense, sometimes over $1,000. And keep in mind that if you are buying a relatively new or used car, you probably won’t even need the warranty since they often only cover major repairs like engine or transmission failure.<ref>http://www.consumerreports.org/cro/magazine/2014/04/extended-warranties-for-cars-are-an-expensive-game/index.htm</ref> | + | #*Extended car warranties can ensure you don’t have to pay for big repairs. The flip-side of this is an extra expense, sometimes over $1,000. And keep in mind that if you are buying a relatively new or used car, you probably won’t even need the warranty since they often only cover major repairs like engine or transmission failure.<ref name="rf9">http://www.consumerreports.org/cro/magazine/2014/04/extended-warranties-for-cars-are-an-expensive-game/index.htm</ref> |
#**New cars, as well as some used cars, have warranties that protect the vehicle for years, so extended warranties rarely make financial sense. | #**New cars, as well as some used cars, have warranties that protect the vehicle for years, so extended warranties rarely make financial sense. | ||
| − | #*Payment protection plans are similar to credit insurance, only they are provided by the dealers themselves. The deal is that if you can’t make your payments, the dealer offers to cover you for a few months.<ref> http://usnews.rankingsandreviews.com/cars-trucks/daily-news/090401-Which-Automaker-Has-the-Best-Payment-Protection-Plan-/</ref> | + | #*Payment protection plans are similar to credit insurance, only they are provided by the dealers themselves. The deal is that if you can’t make your payments, the dealer offers to cover you for a few months.<ref name="rf10"> http://usnews.rankingsandreviews.com/cars-trucks/daily-news/090401-Which-Automaker-Has-the-Best-Payment-Protection-Plan-/</ref> |
#*However, payment protection plans are highly restrictive and the dealer only becomes liable if the purchaser dies, gets seriously ill, or becomes unemployed. Most financial professionals discourage the purchase of payment plans since they are expensive and rarely pay off. | #*However, payment protection plans are highly restrictive and the dealer only becomes liable if the purchaser dies, gets seriously ill, or becomes unemployed. Most financial professionals discourage the purchase of payment plans since they are expensive and rarely pay off. | ||
| − | #See if you have what lenders want. Once you’ve reviewed your finances and seen your credit score, think about what lenders are looking for and consider if you have it. Lenders look favorably on people with a mid-range credit score (620-680), higher income, and having been with the same employer for a few years.<ref> http://money.usnews.com/money/personal-finance/articles/2014/09/04/how-to-buy-a-car-with-low-or-no-credit</ref> | + | #See if you have what lenders want. Once you’ve reviewed your finances and seen your credit score, think about what lenders are looking for and consider if you have it. Lenders look favorably on people with a mid-range credit score (620-680), higher income, and having been with the same employer for a few years.<ref name="rf11"> http://money.usnews.com/money/personal-finance/articles/2014/09/04/how-to-buy-a-car-with-low-or-no-credit</ref> |
#*If this doesn’t describe you (and it likely doesn’t if you have no credit history) that’s not a deal breaker. There are other ways to get a loan without a credit history. | #*If this doesn’t describe you (and it likely doesn’t if you have no credit history) that’s not a deal breaker. There are other ways to get a loan without a credit history. | ||
#*If you don’t have these things, you may want to find a co-signer who does to help prove that you are good for the loan. However, by co-signing on the loan, your co-signer is now legally liable for any payments you fail to make, which can have negative consequences for their credit score or financial health. Make sure both you and your co-signer know the associated risks before signing. | #*If you don’t have these things, you may want to find a co-signer who does to help prove that you are good for the loan. However, by co-signing on the loan, your co-signer is now legally liable for any payments you fail to make, which can have negative consequences for their credit score or financial health. Make sure both you and your co-signer know the associated risks before signing. | ||
===Gathering Your Paperwork=== | ===Gathering Your Paperwork=== | ||
| − | #Find proof of employment. In order to prove that you are not a risky investment to lenders, you need to provide proof of employment. Gather both paper and electronic copies of as many of these documents as you can locate:<ref | + | #Find proof of employment. In order to prove that you are not a risky investment to lenders, you need to provide proof of employment. Gather both paper and electronic copies of as many of these documents as you can locate:<ref name="rf3" /> |
#*Last year’s W2 tax form | #*Last year’s W2 tax form | ||
#*Pay stubs showing 6 months of employment | #*Pay stubs showing 6 months of employment | ||
#*An offer letter from your current employer with the salary listed | #*An offer letter from your current employer with the salary listed | ||
| − | #Show your assets. Some lenders will take assets as collateral when you have no credit history. If you have large investments that you are willing to put up as collateral, this may make lenders more inclined to take you on.<ref>http://www.dmv.org/buy-sell/auto-loans/bad-credit-auto-loan.php</ref> | + | #Show your assets. Some lenders will take assets as collateral when you have no credit history. If you have large investments that you are willing to put up as collateral, this may make lenders more inclined to take you on.<ref name="rf12">http://www.dmv.org/buy-sell/auto-loans/bad-credit-auto-loan.php</ref> |
#*Financial institutions are more willing to accept collateral in addition to the auto being financed and the borrower is likely to get better terms at these financial institutions than at a dealer that does not accept collateral. | #*Financial institutions are more willing to accept collateral in addition to the auto being financed and the borrower is likely to get better terms at these financial institutions than at a dealer that does not accept collateral. | ||
#*Of course, if you have no credit history, this means you were given the assets or paid cash up front for them. | #*Of course, if you have no credit history, this means you were given the assets or paid cash up front for them. | ||
| − | #Get some references. Having people who can vouch for your commitment to paying back loans is helpful, especially if you have taken personal loans from people and paid them back. Make a list of at least six people with their names and contact info.<ref | + | #Get some references. Having people who can vouch for your commitment to paying back loans is helpful, especially if you have taken personal loans from people and paid them back. Make a list of at least six people with their names and contact info.<ref name="rf3" /> |
#*References are also useful in applying for discounts such as a first-time buyer discount. | #*References are also useful in applying for discounts such as a first-time buyer discount. | ||
| − | #Find proof of school or military status. If you want to be considered for a discount by a car dealership, show proof of being a student (or recently graduated) or in the military. Loan companies may also look favorably on your participation in such organizations.<ref | + | #Find proof of school or military status. If you want to be considered for a discount by a car dealership, show proof of being a student (or recently graduated) or in the military. Loan companies may also look favorably on your participation in such organizations.<ref name="rf3" /> |
#*Proof can be your ID card, enrollment papers, or diploma. | #*Proof can be your ID card, enrollment papers, or diploma. | ||
#Print out your credit reports. Lenders will make credit history inquires on their own, but having your report and score on your person can improve your odds, especially if you made recent changes to mistakes on your history. Having these numbers can also help your salesman find a price that could potentially be balanced by a good interest rate. | #Print out your credit reports. Lenders will make credit history inquires on their own, but having your report and score on your person can improve your odds, especially if you made recent changes to mistakes on your history. Having these numbers can also help your salesman find a price that could potentially be balanced by a good interest rate. | ||
===Negotiating the Loan=== | ===Negotiating the Loan=== | ||
| − | #Find loans on your own. When you go to a dealer for a new car, chances are your salesman will try to find you a loan using his system. However, you might be able to get a loan from your bank at a better interest rate. If you bank at a credit union, your odds are higher of getting a loan because these institutions are smaller and more willing to work with you personally.<ref | + | #Find loans on your own. When you go to a dealer for a new car, chances are your salesman will try to find you a loan using his system. However, you might be able to get a loan from your bank at a better interest rate. If you bank at a credit union, your odds are higher of getting a loan because these institutions are smaller and more willing to work with you personally.<ref name="rf5" /> |
#*You may also be able to get a loan with a credit union even if you don’t bank there. | #*You may also be able to get a loan with a credit union even if you don’t bank there. | ||
| − | #*Consider the website Peer to Peer, where you can get a loan from an individual instead of an institution.<ref>http://www.quickanddirtytips.com/money-finance/credit/5-ways-to-get-a-loan-with-bad-credit?page=1</ref> | + | #*Consider the website Peer to Peer, where you can get a loan from an individual instead of an institution.<ref name="rf13">http://www.quickanddirtytips.com/money-finance/credit/5-ways-to-get-a-loan-with-bad-credit?page=1</ref> |
#*Consider borrowing money from a relative. | #*Consider borrowing money from a relative. | ||
#Seek out a co-signer. Find someone who has good credit amongst your friends and family to co-sign on your car loan. This will boost a lender’s confidence in the loan. Make sure it is someone who trusts you, because the record of this loan goes on both your credit reports. | #Seek out a co-signer. Find someone who has good credit amongst your friends and family to co-sign on your car loan. This will boost a lender’s confidence in the loan. Make sure it is someone who trusts you, because the record of this loan goes on both your credit reports. | ||
#*If you ever default on this loan, the lender will look to the co-signer for payment, making your relationship very uncomfortable. | #*If you ever default on this loan, the lender will look to the co-signer for payment, making your relationship very uncomfortable. | ||
| − | #Make sure your loan has a low APR. If you are offered a loan, make sure it has a low enough interest rate to keep your monthly payments low. For example, someone with a mid-range credit score (620-680) is looking at an interest rate of between 5 and 6%.<ref | + | #Make sure your loan has a low APR. If you are offered a loan, make sure it has a low enough interest rate to keep your monthly payments low. For example, someone with a mid-range credit score (620-680) is looking at an interest rate of between 5 and 6%.<ref name="rf12" /> |
#*A credit score lower than that is looking at an interest rate anywhere from 6.5 to 13%. | #*A credit score lower than that is looking at an interest rate anywhere from 6.5 to 13%. | ||
#Try to get a loan with a shorter term. Although monthly payments might be higher, getting a loan for a shorter amount of time means paying less interest in the long run. If you can handle it financially, try to get a loan for four years or less. | #Try to get a loan with a shorter term. Although monthly payments might be higher, getting a loan for a shorter amount of time means paying less interest in the long run. If you can handle it financially, try to get a loan for four years or less. | ||
#Look into getting discounts. Some lenders and car lots will give you discounts based on things you have done and memberships you have. If you qualify for a discount of any kind, bring the paperwork for it. | #Look into getting discounts. Some lenders and car lots will give you discounts based on things you have done and memberships you have. If you qualify for a discount of any kind, bring the paperwork for it. | ||
| − | #*Some places (both dealerships and lenders) will offer discounts for being a student, a recent graduate, being in the military, or being a first-time buyer. <ref | + | #*Some places (both dealerships and lenders) will offer discounts for being a student, a recent graduate, being in the military, or being a first-time buyer. <ref name="rf3" /> |
#*All of these discounts tend to come with strict requirements. For example, the first-time buyer discount may require 10% down, references, a steady job, and car insurance. | #*All of these discounts tend to come with strict requirements. For example, the first-time buyer discount may require 10% down, references, a steady job, and car insurance. | ||
#*You may be able to get a lower monthly payment if you lease instead of buy. | #*You may be able to get a lower monthly payment if you lease instead of buy. | ||
