How to Buy a Car with No Credit (or Bad Credit)

December 1, 2020

Having bad credit, or no credit, and wanting to buy a car is not impossible. Depending on the rest of your financial situation, you can absolutely learn how to buy a car with no credit.

We’ll be focusing on the no credit or bad credit aspects of car buying in this article. For more comprehensive advice on car buying, please look over our in-depth case study that covers the general concepts involved in buying a car

Are you ready to learn how to buy a car with no credit, or with bad credit? Let’s get started by really nailing down the definition of these terms.

What is “No Credit” and How to Buy a Car with No Credit

No credit means you have no credit history. You have no credit profile because you’ve never established any sort of credit history. As far as the banks and lenders are concerned, you don’t exist.

Yet, here you are, trying to buy a car. You definitely exist. What do you do?

You’ll need to save up and put a ton of cash down. You’ll also need to have all your paperwork in order, along with having plenty of quality references. Keep reading – we’re about to cover all of this in detail.

What is “Bad Credit” and How Does it Impact Buying a Car?

Whereas no credit means you simply don’t have a credit history, bad credit means you do have a credit history, and it’s not good.

Bad credit, which is officially known as subprime, is a credit score that’s between 500 and 600. If you’re below 500, that’s considered super subprime and would also fit within the ‘bad credit’ label.

Having bad credit indicates to any potential lenders that you have not handled past loan obligations well. You might have taken out an auto loan and failed to make payments, or you took out a few credit cards and let them go into collections.

Either way, now you’re in a situation where it’s hard for finance managers at dealerships to convince lenders to approve you for a loan.

If your credit score is over 500, you might be able to find a lender who will loan 90% of the value of the car. That leaves you to cover 10%. If your score is below 500, they might cover 75% of the car, leaving you with 25%.

This means that you should start saving because you’re going to be expected to put more money down than someone with a higher credit score.

It’s worth noting that you should avoid visiting multiple dealerships to get approved by a lender. Doing so can harm your credit score by stacking up hard inquiries. In theory, when shopping for a similar item (a car) over 30 days, it counts as one credit inquiry. However, it’s truly unclear how the credit bureaus interpret multiple inquiries for subprime candidates.. Avoid multiple dealerships if at all possible and work with one or two.

Be realistic about the cars you are looking at. A bad credit score will decrease your buying power substantially, even if you are putting a good amount of cash down. Consider buying a certified pre-owned vehicle to get the most value out of your buying power.

Lastly, be ready to have a higher APR than what’s being advertised. For people with a subprime credit score, the average rate for a new car is 12.15%, and for a used car it’s 16.78%.

How to Buy a Car with No Credit: Put A Lot of Cash Down

If you’re looking into how to buy a car with no credit, your first plan of action is to save up as much cash as possible. The more cash you’re able to put down, the better.

If you’re looking at a $10,000 car and you have $3,000 down, the finance manager has a great argument with the lender about why they should approve someone with no or bad credit: you don’t want to lose $3,000.

Conversely, if you have $300, the argument falls flat.

People who investigate how to buy a car with no credit often end up going to “buy here, pay here” car lots. Be warned, those types of places will require even more cash down than most dealerships. Essentially, the cash down amount that they require will cover their investment in the car. That way, if you stop paying the loan, at least they got out what they paid for the car.

Sidenote: If you’re going to work with a “buy here, pay here” lot, make sure they report your loan to credit bureaus.

Get Your Paperwork in Order

Before you even visit the dealership, get all your paperwork in order. Anyone wanting to know how to buy a car with no credit should know that you’re going to have to prove that you have a job and stable personal finances. You should prepare:

  • Several months of pay stubs that back up your income claim
  • Utility bills that show your address
  • Signed lease in your name, if renting
  • 6-10 references, including names, addresses, and phone numbers of people who know you personally or professionally

All of this paperwork forms a well-rounded image of who you are, financially speaking. It helps lenders approve your request, even if you have no or bad credit.

Become a Member of Your Local Credit Union

Another way to go is to look for financing options outside of the dealership.

Joining a credit union is the best thing you can do if you’re looking at how to buy a car with no credit and want to look outside of the dealership for options. That’s because credit unions look at members with a more favorable eye than other lenders. You might be able to secure an auto loan with more favorable interest rates than if you went to the dealer, too.

Credit unions are easy to join. There are all types of credit unions, look for one in your area, and join up.

Can You Buy A Car with No or Bad Credit? Yes!

You’ve now learned that if you’re looking at how to buy a car with no credit, or bad credit, you still have options. Your lack of a credit profile, or your bad credit profile, doesn’t prevent you from owning a vehicle.

Save up for a large down payment, bring all your paperwork, and be ready to have a higher APR than advertised. You’ll be able to drive away from the lot happy.

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