Financing a car with no credit is often a necessity for college students, recent graduates, working teens, and other first-time car buyers. In some cases, it is easier to get an auto loan with no credit history than it is to get one with a history of bad credit. The major factors that affect your approval are employment status, down payment, and the vehicle that is to be purchased.
Approval Factors for People with No Credit
The longer that you have been employed within the same field or industry is an obvious decisive factor. Your chances of approval improve greatly if you have worked within the same industry for at least one year – at the same company, especially. Secondly, most lenders who specialize in these sorts of financing situations want to see that you have a down payment (any combination of cash and trade) that equals at least twenty percent of the purchase price of a vehicle. Lastly, you will find it easier to get a loan if the vehicle is used. The lower the loan amount – and therefore the potential loss to the lender – the better your chances of being approved.
The Alternative: Cosigned Auto Loans
Many first-time car buyers and recent graduates end up asking a parent or trusted relative to cosign their loan. When a cosigner is attached to an application, the lender will determine the approval and interest rate based on the cosigner’s credit and income. Obviously, even if you can get approved for financing without a cosigner, adding one could substantially improve your interest rate, approved amount, and lending terms. However, it is important to know and remember that the cosigner will be liable for the debt if you default or miss payments. So it is a very big responsibility.
Building a Credit History Before You Apply
No matter what, you will probably face a higher interest rate when financing a car without credit. Once you consider all of the above factors, think about this. Do you need the vehicle immediately? Could you get a credit card, whether it is secured or not, and make at least six on-time payments before you apply for an auto loan? If so, you will then have a credit history and should be able to get better terms on any loan for which you apply.
Choosing an Inexpensive, Reliable Vehicle
It is best to eschew anything too sporty or luxury-oriented, as insurance rates will be high given your lack of credit, not to mention your APR. Obviously the amount you spend on your vehicle will be determined by your income and budget, but it is generally best to dedicate no more than 10% of your gross monthly income to your car payment, while opting for the shortest loan you can afford. Remember, you need to leave enough in your budget to afford gas, insurance, and maintenance. In these days of high gas prices, it is typically best to avoid trucks or SUVs (unless specifically required for your job or hobbies) in favor of a more fuel efficient model. Nearly every major manufacturer now offers at least one model that returns close to 40 miles-per-gallon.
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