How to Get a Car Loan with No Credit

Quick Answer:

Getting a car loan when you have no credit can be difficult, but it is possible. We'll show you how to get a car loan with no credit so you can get behind the wheel and on the road to building your credit. It starts by understanding what credit is and then working through the strategies to get a car loan with no credit. 

Table of Contents: 

Understanding Credit:

For many, “credit” probably conjures up a reasonably nebulous mental image. But, of course, you may know that it has something to do with borrowing money and paying it back over time. Still, beyond that, the details are probably pretty fuzzy. Well, consider this your crash course.

What is credit?

In a nutshell, credit is simply the ability to borrow money. When you have good credit, lenders are more likely to loan you money – and they’ll probably give you more favorable terms, like lower interest rates. 

What is no credit?

Having no credit is actually not as bad as it sounds. If you have no credit, you don’t have any active accounts that are being reported to the credit bureaus. This usually happens when you’re young and haven’t taken out any loans or opened any lines of credit yet. It’s also common among immigrants who may have established financial history in their home countries but not in the United States. So having no credit is not necessarily a bad thing. In fact, some lenders may actually see it as a positive sign since you don’t have any negative marks on your record.  

Two people looking at a computer screen on a website for no credit
Get Pre-Qualified for a New Auto Loan

What is inactive credit?

Inactive credit is similar to having no credit in that it means you don’t have any active accounts being reported to the credit bureaus. However, the difference is that inactive credit generally refers to people who have had credit accounts in the past but are no longer using them. This could be because they paid off their debts and closed their accounts or because they’ve become “zombie” accounts that still exist but aren’t being used. Inactive credit can be seen as both good and bad by lenders. On the one hand, it shows that you can manage debt responsibly. Still, on the other hand, it can make lenders worry that you’re not actively using your lines of credit.  

What is low credit?

Having low credit is precisely what you think it is. It means you have active accounts with negative marks being reported to the credit bureaus. This could be because you’ve made late payments, exceeded your credit limit, or defaulted on a loan. Low or bad credit can make it challenging to get approved for new loans or lines of credit. If you get approved, you’ll almost certainly pay higher interest rates than people with good credit scores. That’s why it’s so important to stay on top of your payments and keep your debt under control. Missing just a few payments can tank your score for years to come.  

Are no credit and low credit the same thing?

Absolutely not. As we’ve explained, having no credit means you don’t have any active accounts being reported to the credit bureaus. That’s not necessarily a bad thing. On the other hand, low or bad credit means you do have active accounts with negative marks being reported. This will make it harder for you to get approved for new loans and lines of credit — and if you are approved, you’ll probably pay higher interest rates. 

Inforgraphic explaining the credit scores that are considered high credit

What is a good credit score?

A good credit score is any score that falls in the “good” or “excellent” range on the major credit scoring scale. For FICO scores, that’s a score of 670 or above. For VantageScores, it’s a score of 700 or above. Generally speaking, having a good credit score means you’re a low-risk borrower, which means you’re more likely to get approved for loans and lines of credit. In addition, you’ll probably get more favorable terms, like lower interest rates. So if you currently have no credit, this is what you should aim for.  

Getting a Car Loan with No Credit

You’ve finally saved up enough money for a down payment on a car, but there’s one more obstacle in your way: you have no credit history. But don’t worry — it is possible to get a car loan with no credit. Here are a few things you’ll need to do. 

Collect All the Proper Documents

One of the first things any lender will want to see is proof of your employment history and current pay stubs. They’ll also want to see previous addresses and how long you lived there. If you have any bills that you’re regularly paying, such as rent or utilities, those can also help build trust with the lender. Finally, they’ll need to see your driver’s license. Collecting all of these items ahead of time will help speed up the loan process once you find a lender. 

Woman standing at a table looking through paperwork

The lender will want to see all of this information to verify that you are who you say you are and that you’re capable of making regular payments on the loan. For example, your employment history and current pay stubs show you have a steady income. In addition, an address history indicates stability, and you’re not at a high risk of defaulting on the loan.  

Find a Cosigner

You may need to find a cosigner for your loan if you don’t have any credit history. A cosigner is someone who agrees to take on the responsibility of the loan if you cannot make the payments. This is a significant risk for the person, so make sure you can make the payments before asking someone to cosign for you. If you default, they’ll be stuck with the bill, and their credit will also suffer. 

Speaking of credit scores, it is also important that your cosigner has good or excellent credit. Since you have no credit history, the lender will heavily rely on your cosigner’s credit score to decide the interest rate and whether or not you qualify for the loan. On the other hand, if your cosigner has low or bad credit, you may still be eligible for a loan, but it will have a higher interest rate which may defeat the purpose.  

Inforgraphic on what to do it you have zero credit
Now is The Time to Refinance Your Car Loan

Save for a Bigger Down Payment

A down payment is the money you put down when you get the loan. The bigger the down payment, the less money you’ll need to borrow, and the lower your monthly payments will be. Lenders often like to see a down payment of 10 percent or more, but if you can swing 20 percent or more, that’s even better. 

A more significant down payment also shows the lender that you’re serious about making regular payments on the loan since you have more skin in the game. This can help offset some of the risk associated with lending to someone with no credit history. 

Be Prepared to Pay a Higher Interest Rate

Unfortunately, you will likely be charged a higher interest rate on your loan if you don’t have any credit history. This is because you’re seen as a higher risk to the lender, and they want to be rewarded for that risk. 

If you have a cosigner with excellent credit, their good credit can help offset some of the risk, which may result in a lower interest rate. But if you don’t have a cosigner or your cosigner has bad credit, you’ll likely be stuck with a higher interest rate. 

Build Credit and Wait

If you cannot get a car loan with no credit right away, don’t worry. You can take some steps to build your credit to get a loan in the future. This is more of a long-term strategy, but it will help you get better terms when you’re ready to apply for a loan. There are easy and sure ways to build your credit score, so researching and finding what works best for your situation is a good place to start. General ways people begin to develop a good credit score include: 

Infographic on how to build credit
  • Opening a secured credit card – A secured credit card involves a deposit, which becomes your credit limit. For example, if you put down a $500 deposit, your credit limit — and maximum balance — will be $500. This is an excellent way to build credit because it shows that you can manage a credit limit and make regular, on-time payments. 
  • Becoming an authorized user – You can also become an authorized user on someone else’s credit card account. This means you’ll have your own card that you can use, but the account will be in someone else’s name. As long as the account is in good standing, this will help build your credit score. 
  • Applying for a credit-builder loan – A credit-builder loan is where the money you borrow is deposited into a savings account. Once you make all your payments on time, you’ll have access to the money in the account, plus any interest earned. This is a good way to develop a credit history because it shows that you can make regular, on-time loan payments. 

Beware of Financing Through the Car Dealership

Many car dealerships offer in-house financing, which may seem convenient if you don’t have any credit. In addition, they often claim they can finance anyone, no matter their credit score. But beware — these loans frequently come with high-interest rates, and you could pay more for your car than it’s worth. 

Why do they do this? In truth, dealerships make very little profit from the vehicle sale. Instead, their profit comes from other products they sell, such as extended warranties, gap insurance, and — you guessed it — financing. So while they may claim to be helping by financing you, they’re really just trying to make more money off you in the long run. 

Woman looking frustrated and looking at bills while sitting at a table with her head in her hand

If you decide to finance through the dealership, shop around at different dealerships for the best interest rate. And if you can get pre-approved for a loan from a bank, credit union, or another third-party lender before going to the dealership, that’s even better. This way, you’ll know exactly how much car you can afford and what interest rate you’ll be paying. Otherwise, you’ll be looking at a much higher interest rate and could end up in a loan you can’t afford. And that will leave you looking for tips on how to get out of a bad car loan

Bottom Line

Getting a car loan with no credit is possible, but it may not be easy. You’ll likely need a cosigner or a sizable down payment, and you can expect to pay a high-interest rate. If you cannot get a loan right away, take some steps to build your credit to get better terms in the future. Whatever you do, beware of financing through the dealership. They often try to make more money off you by offering loans with high-interest rates. 

Why Are Interest Rates Higher on Used Cars? Your Questions Answered

If affordability drives your search for a new car, choosing a used vehicle is one way to save. One thing to keep in mind, however, is that used vehicles can come with some hidden costs, particularly if you choose to finance your vehicle. In most cases, interest rates on used car loans are higher than those offered on new car purchases. 

Why Are Interest Rates Higher?

Below are some of the reasons why lenders charge more to finance a used vehicle:

1. Manufacturer incentives

Manufacturers are in the business of selling new cars, so naturally they want to offer strong incentives to customers for buying one. In addition, the dealerships themselves often have auto financing programs, so it makes sense to offer attractive rates on new vehicles. 

If it does seem like the dealerships in your area are offering much better terms on new vehicle loans, take note of their rates but then check out used car lots as well. If you have good credit and sufficient income, you might still be able to get an excellent rate on a pre-owned vehicle.

2. Car value

Car lenders are at an advantage over other creditors, such as credit card companies. This is because the automobile has value which serves as collateral to secure the loan. If a borrower defaults on loan payments, the lender can repossess the car and sell it to try to recoup any losses. 

There is, however, a downside to any secured loan. The value of the collateral itself might decrease significantly after a loan is approved. In such a case, the lender could suffer significant losses if it is unable to sell the collateral for anything close to its estimated value at the time that the loan was granted.

When it comes to auto loans, there are a few factors that can present a significant risk to the value of the vehicle. First, used car appraisals can be difficult to perform, making it hard to establish a car’s value. The second issue is that cars are subject to damage caused by poor road or weather conditions, careless driving or accidents. 

The sale of a repossessed vehicle that has been damaged or that has mechanical problems might not cover the balance on a defaulted car loan. If this is the case, the lender might have to go to court and seek a monetary judgment against the borrower. 

All of this takes time, money and, if the borrower is bankrupt, the lender might never recoup the balance or court costs. The higher interest rates for used cars help to offset these risks. 

3. Credit scoring

Loan terms are based, in part, on the likelihood of repayment and the risk of default. Lenders use credit scores to assess these risks and set interest rates (and fees) accordingly. Used car buyers could have lower credit scores and, as a result, might be offered loans at higher rates.

What Can I Do to Lower My Interest Rate?

Should the possibility of being offered a higher interest rate deter you from purchasing a used car? Not necessarily. Buying a used car might be the least expensive way to get the car that meets your needs. 

However, it is important to understand your costs and risks before making a decision. There are also several things that you can do to increase your chances of getting an attractive interest rate on your car loan:

  1. Run the numbers: If you are considering a used vehicle because you think it will be cheaper than buying a new car, use a refinance car loan calculator to calculate your actual costs. You might find that, over time, it is less expensive to purchase a new car.
  1. Clean up your credit: Many people with no credit, or less-than-perfect credit, are able to secure financing for a car purchase. However, the best terms are usually offered with good credit scores. 

If you have the time to do so, order your credit reports, correct any errors and start paying down debt. Your credit score might increase even after just a few months of work, potentially saving you thousands of dollars over your loan term.

  1. Save up a down payment: A large down payment builds collateral, something that is attractive to lenders because they have to worry less about your car’s value if you default on your payments. Making a substantial down payment also reduces the balance of your loan, which means that you pay less interest over time.

Once you’ve done all of the above, you’re in the best position to apply for financing (or refinancing). 

Final Thoughts

Buying a car is a big commitment. If you are in the market for a used car, take your time when selecting a vehicle and securing financing. Remember also that loan terms address interest rates, the length of your repayment period and, in some cases, extra fees. Review your costs carefully before taking out a car loan. 

If you’ve already financed your car but aren’t happy with your current loan terms or interest rate, you can always apply for refinancing.

How Soon Can You Refinance a Car?

If you’ve considered refinancing your car, know that it might be possible to refinance as soon as a few months after your original purchase, though your terms could be better if you wait six months to a year. Don’t wait too long, though. If you are too far into your repayment term, lenders might be unwilling to approve your application.

Refinancing a Car Loan

Refinancing a car loan involves getting approved for a new loan that will:

  1. Pay off your current auto loan.
  2. Allow you to pay off your vehicle under more favorable terms.

Refinancing will require you to apply for a refinance loan, a process similar to auto loan financing for a new car.

Refinancing in the First Months of Your Loan

If you recently purchased a car and aren’t happy with your current loan terms, refinancing might be a possibility. Still, there are several factors that could hamper your ability to win approval for a refinance or to get the terms you are looking for:

  1. In cases where you have very recently purchased your car (such as in the past month), your car title or registration might not yet be processed. A lender will either need the title (if you are in one of the states that allows car owners to hold their titles before loan payoff) or registration to begin the refinancing process. Because of this, there might be a delay in being able to refinance.
  2. Taking out a car loan often lowers your credit score. This is due to two factors. First, the hard pull on your credit report results in a credit inquiry being reported to the credit bureaus. This can take a few points off your score. Your loan also contributes to your debt load, which, depending on how much debt you have, can also lower your score.
  3. Some lenders have a policy against refinancing a new loan. They’ll want to see at least six months of payments before considering your refi application.

Still, everyone’s situation is unique and you could be able to get approved for refinancing in the earliest months of your loan.

When Is the Right Time to Refinance a Car Loan?

Loans that are six to 18 months old are often in the “sweet spot” for refinancing. There are two primary reasons for this:

  • No administrative or credit issues: By this time, your paperwork has been sorted out and your credit score has likely rebounded.
  • Loan balance is still high: A higher loan balance makes the refinance profitable for the lender.
  • It’s less likely that you are upside down on your car loan at this point. Being upside down on your car loan means that you owe more to your lender than your car is worth. Many lenders won’t consider refinancing in this situation.

There are other factors to consider, however. If interest rates are currently high, refinancing is likely not a good idea. Pay attention to economic indicators before seeking a refi loan.

Another thing to consider is your use of credit and financial situation. If you have recently financed a large purchase, you might find it hard to get attractive terms on a refinance. Use our refinance car loan calculator to determine how much you’ll pay each month and over time.

Don’t Wait Too Long to Refinance Your Car Loan

Unfortunately, it’s also possible to wait too long to refinance your auto loan. Here are some scenarios in which this could be the case:

  1. Your car has a lot of miles on it: Cars with a lot of mileage are worth less, which can make refinancing more of a challenge.
  2. You are close to paying off your loan: Lenders want there to be at least a few thousand dollars left on your loan balance before agreeing to issue a refinance loan.
  3. You are already in financial trouble: Refinancing a car loan can be a decent strategy if you need to lower your monthly payments, you still have good credit and a verifiable income. If your credit has already been damaged or you’ve lost your job, you might still qualify for refinancing, but the process might take a bit longer.

It pays to be a savvy consumer, particularly when it comes to large purchases. If you believe that you might be able to get a better deal on your auto loan through refinancing, take the time to do some research and then make sure to shop around to find the best loan for you.

How Long Does It Take to Refinance a Car?

The time it takes to refinance a car loan depends on a few factors, including the completeness of your loan application and your lender’s policy. The process can happen quickly, often within a few days of your application. Preparing for refinancing, including checking your credit reports and making sure that you can document the information in your application, can help prevent delays.

Finger about to press a red button on a conceptual refinance calculator

Refinancing an Auto Loan

Refinancing an auto loan allows you to secure more favorable terms for your car loan. If you are approved for refinancing, your old loan is rolled into your new, refinanced loan. If you’ve applied for auto loan financing in the past, you’ll find many similarities between the two processes.

Why Refinance?

People refinance their vehicle loans because they want — or need — a change in their current loan agreement. Refinancing allows them to take out a new loan with terms that better meet their needs. Here are some common scenarios:

Interest Rate Change

If interest rates drop during your loan repayment period, you might be able to save some money by refinancing at a lower rate.

Improved Credit

If you financed your original car loan while you had no or damaged credit, check your current credit score. If it has improved since you purchased your car, you may qualify for a lower interest rate if you refinance.

Need to Lower Monthly Payments

Even if you don’t qualify for a lower interest rate, you might be able to reduce monthly payments by refinancing for a longer loan term. You’ll pay more money over time, but the smaller payments each month might be easier on your budget.

Credit report with magnifying glass

Preparing to Refinance

If you are considering a refi on your auto loan, there are several things that you can do before applying that can help ensure a speedy acceptance and, hopefully, approval:

  1. Use a refinance car loan calculator to see what you can expect to save if you decide to refinance. 
  2. Order your free credit reports from all three major credit bureaus, TransUnion, Experian and Equifax. Check your report for errors and, if you find them, get them corrected before applying to refinance.
  3. Refrain from applying for new credit, making major purchases or closing credit card accounts. All of these actions can negatively impact your credit score, reducing your chances of approval or getting approved for favorable refinancing terms.
  4. Gather the documents you may need to apply for your loan. Your lender will tell you what documents you need, but be prepared to provide proof of identity, income and assets. For example, you may need to include pay stubs, W-2s or bank statements with your loan application.

Waiting for a Decision

If your loan application is complete and there aren’t any red flags during the application process, you can expect a decision within a few days. If you are approved for refinancing, the lender may handle paying off your old loan for you, or you may receive the funds yourself so that you can pay off your old balance. Receiving the funds, or the forwarding of the funds, can take a few weeks, so be sure to continue to make payments on your old loan until you can confirm that it has been paid in full.

Once your old loan is paid, you’ll continue to make payments on your new, refinanced contract.

Refinancing can be an effective way to make owning a car more affordable, so it is definitely worth taking the time to research this option with AUTOPAY. Get in touch with us today and one of our knowledgeable team members will answer your questions and help you get the process started.

Should I Pay Off My Car Loan Early: Advantages and Disadvantages

If you’re looking to improve your financial standing and lower your debt, you might want to consider paying off your car loan before the obligatory pay-off date. While doing so can certainly bring some benefits — more money in your pocket and the freedom of owning your car outright — there are a couple of important downsides to consider as well.

close-up of a pen on a desk with a calculator on top of a paper reading "Debts" with a pie chart near it

The Pros and Cons of Paying Off Your Car Loan Early

When you take out a car loan, you agree to pay for the cost of the vehicle (the principal) as well as interest. Your annual percentage rate (APR) is the percentage of interest you pay each month. When you pay more than the minimum, that extra money goes towards the principal, lowering how much you owe in interest. That’s just one of the pros of early pay-off, but there’s more to know.

Pro: Paying the loan off early could save you cash in the long run.

Making an extra payment here and there, rather than making a single lump-sum payment speeds up the repayment process without draining your savings. Just make sure your overage payments go toward the principal of your car loan rather than the interest. These are called “principal-only” payments.

Con: Some loans include precomputed interest, so early payoff may not save you money in the long-run.

It is important to note that some car loans include precomputed interest, or interest that is calculated upfront. In these cases, you may not be able to save money on interest if you pay off your loan early. 

Make sure you determine the amount of interest pay-off will save you in the long run. To find out if your interest was calculated up-front, look at your statement. If your interest is precomputed, it will be lumped together with the principal rather than a separate fee. You should speak to your lender if you aren’t sure.

Pro: More money in your pocket each month.

Another advantage to paying off your car loan before the end of the term is that you will have less money tied up in bills each month. That means, in theory, you’ll have more money to spend in other areas of your life. 

More money in your pocket each month may allow you to save up some extra cash faster for a new car, build an emergency fund, chip away at your student loans, or free up money for a down payment on a house. In many cases, it will help improve your financial situation. But remember that paying off your loan balance can be costly, so while it may lower your monthly budget, it may also put a significant dent in your savings account. 

Pro: Improved debt-to-income ratio.

Simply put, your debt-to-income ratio, or DTI,  is the percentage of credit you use each month divided by your gross monthly income. Your DTI is one of many factors lenders and other creditors use to determine whether you will be able to pay back a loan. If your debt-to-income ratio is too high, a lender might be hesitant to offer you credit since it could indicate that you’ve taken on more debt than you can pay back. 

If you have a debt-to-income ratio above 50% and plan to apply for a new loan or line of credit soon, lowering your DTI can help improve your odds of getting approved. 

So how do you lower it? By reducing your monthly debt obligations. Paying off a loan and eliminating a monthly payment, like a car loan, will improve your DTI. However, if paying off a loan in one lump sum is not possible, you can also try to refinance it to lower the monthly payment. In 2021, borrowers who refinanced their auto loans saved an average of $1,158 per year.

Con: You may have to pay a prepayment fee.

It’s critical you understand the terms of your loan since, although it’s rare, it may include a prepayment or pay-off penalty to your lender. Car loan companies impose these fees to make up for the potential interest lost over the life of your loan. These are more common if you have poor credit and a subprime auto loan (meaning you have a high interest rate on your loan due to bad credit).

Fees vary depending on the company and the terms of your loan, but you can expect to pay a maximum of 2 percent of your remaining balance in prepayment costs. Not all car loan terms include this penalty, so be sure to check yours before you decide what to do.

Con: less ‘positive’ activity on your credit score.

Man using his mobile phone to see his credit report and credit score

Consider All the Factors

Ultimately, deciding whether to pay off your car loan early is a big financial decision that comes down to a few key factors. The amount you owe, your interest rate, and the terms of your loan will have a major impact on whether or not prepayment is the best move for you.