Having a great credit score can be incredibly helpful in life. It will help you more easily secure mortgages, lines of credit, good rates on credit cards, reduce insurance premiums, and can sometimes be used as a signal to potential employers that you are a responsible person. Of course, the opposite is true for having bad credit: It will make the financial aspects of your life increasingly difficult and likely, more expensive.

What does it mean when you have no credit? 

While it’s definitely better to have no credit than it is to have bad credit, you should definitely take steps to build up your credit score as soon as you are able to do so, especially if you’re looking to make a big purchase in the future – such as a new or used vehicle. Getting a car loan with no credit can be difficult, but it is not impossible.

The first thing you need is a sizable down payment. It will be difficult to obtain a car loan with no credit and no (or little) down payment. The larger the down payment, the better your chances are of getting a loan. A down payment shows your commitment to the purchase and shows you are willing to take on the risks associated with buying the car.

The second thing you need to do is see exactly what is on your credit history. There might be items on there that you are unaware of. And 1 out of 5 people find negative items that were falsely reported, which could damage your score as well. There are free online tools to help you understand your score.

Gather Documentation

A major factor in getting approved for a car loan is your credit history. If you do not have any credit history, the lender is going to look in other places to verify if you can afford the payment and confirm the likelihood you will repay your debt. The following information can be very useful to auto financing companies:

  1. Copy of your most recent 12 months of bank statements
  2. Documentation of any recurring bills such as a utility or phone bill
  3. Proof of employment history — multiple pay stubs and a recent W2

It is important to have, at a minimum, all the documentation listed above.  Credit history is not required to open a bank account, however, it will confirm if your account is in good standing. Utility and phone bills are also easily set up without credit history and can provide proof to the lender that you can pay a recurring bill on time. A source of a steady income is perhaps the most important factor. The longer you have been with a single employer, the more you will be viewed as a “stable” borrower.

Co-Signer Risk vs. Reward

Speaking with family and friends about financial assistance can be difficult. But this is an option for you if you have bad or no credit. They could either provide you with the full amount of the loan or help you obtain the auto loan by co-signing. A co-signer puts their credit reputation on the line with you – essentially taking on the risk, or liability, of the loan if the borrower defaults. This means that if a payment is missed, the negative mark would appear on both the borrower and co-borrower’s credit history. This is a very risky situation for the co-signer, but so-signers have helped millions of consumers purchase cars.

If you use a co-signer, be sure to establish a few commitments:

  1. Agree to a set interest rate, monthly payment, and payoff date
  2. Create a monthly payment schedule and make payments on time
  3. Whenever possible, pay off your loan early

Banks & Dealerships

Banks and credit unions are a good place to start. If you’ve had an active account, they will have easy access to your account history and will be more likely to give you a loan if you have a prior relationship with them. If you do not have a bank account, set one up as soon as possible. You are more likely to get a better deal at your bank than a car dealership. However, car dealerships should not be completely overlooked as an option – many dealerships have access to special financing and will take financing risks to sell you a car.

A car loan can be complicated to obtain without prior credit. Building good credit is vital for your financial future. We advise all readers to check and monitor their credit score often. There are free online tools that can also help you with financing, like Credit Sesame.