Can You Get a Car If You Just Started Credit? A Comprehensive Guide for First-Time Buyers

Getting your first car is an exciting milestone. The process can be scary, though, especially if you don’t have a credit history. Some people may wonder if they can get a car loan even though they haven’t had credit for long.

The short answer is yes, you can get a car loan with little to no credit history. However, there are some challenges to overcome and steps you’ll need to take to increase your chances of approval.

This complete guide will teach you everything you need to know to buy a car even if you don’t have credit, from how to improve your credit to how to get an auto loan. If you follow these tips, you’ll soon be able to drive your new car around town!

Understanding Credit and Why It Matters for an Auto Loan

Lenders want to see that you can handle your debts well before giving you a car loan. That’s where your credit comes in. Your credit report and credit score tell lenders how well you’ve paid your debts in the past.

In general, the higher your credit score, the better your loan terms will be With strong credit (scores above 700), you can qualify for lower interest rates, which saves you money over the life of the loan. Weak credit scores (below 600) make it harder to get approved, and may force you to accept a higher interest rate if you do qualify

Credit scores are calculated based on your

• Payment history – Have you paid bills on time? Late payments can lower your scores.
• Credit utilization – What percentage of your available credit are you using? High utilization can hurt your scores.
• Credit history length – In general, the longer your history, the better.
• Credit mix – Lenders like to see you’ve managed different types of credit, like credit cards and loans.
• New credit inquiries – Too many recent inquiries can lower your scores temporarily.

When you first start building credit, you’re likely to have a thin file. That means there isn’t enough information yet to calculate your credit scores. Or, your scores may be lower than they could be.

It’s hard to get an auto loan without good credit or a long credit history, but it’s not impossible. Not having much credit? Don’t worry—you can still take steps to improve it.

How to Get Your Credit Ready to Buy a Car

Improving your creditworthiness should start months before you apply for an auto loan. Try implementing as many of these strategies as possible:

• Get added as an authorized user on someone else’s credit card. As an authorized user, the primary cardholder’s payment history will be added to your credit reports. This can give your credit an instant boost, as long as they use the card responsibly.

• Open a secured credit card. Secured cards require a refundable security deposit, and they’re easier to qualify for than regular credit cards. Use your secured card to build a positive payment history.

• Take out a credit-builder loan. Also known as a secured personal loan, credit builder loans help establish your ability to manage installment credit. Like secured cards, these loans require an upfront security deposit.

• Ask your landlord to report your on-time rent payments. Since rental payment history isn’t automatically reported to the credit bureaus, ask your landlord to report your positive payment track record. This can give your credit a nice boost.

• Pay all bills on time, every time. Payment history is the biggest factor in your credit scores. Set up autopay, reminders, or whatever you need to never miss a payment.

• Keep credit card balances low. High balances hurt your credit utilization rate. Ideally, keep balances below 10% of your credit limit.

• Limit hard inquiries. Only apply for the specific credit you need right now to avoid unnecessary inquiries. Too many can indicate credit hunger and lower your scores.

• Monitor your credit reports. Make sure there are no errors or fraudulent accounts hurting your credit. Dispute any inaccuracies with the credit bureaus.

The longer you use credit responsibly, the higher your scores will climb over time. Within six months or so of implementing credit-building strategies, you can significantly improve your credit health.

Getting Approved for a Car Loan With Limited Credit

While getting approved for an auto loan with limited credit is possible, you’ll likely need to take a few extra steps compared to well-established borrowers. Here are some tips on getting a lender to say yes:

• Consider getting a co-signer. Adding a cosigner with good credit can improve the odds of approval and score you a lower interest rate. Make sure your cosigner understands they’ll be equally responsible for the loan if you can’t pay.

• Shop around for lenders. Each lender has its own approval criteria. Expand your options by comparing quotes from banks, credit unions, and online auto lenders.

• Put down a larger down payment. The higher your down payment, the lower the loan amount you have to borrow. A bigger down payment signals you’re financially committed to the loan.

• Look for first-time buyer programs. Some lenders offer special auto financing programs for first-timers with limited credit. These programs may have discounted rates or smaller down payment requirements.

• Consider a loan from the dealership. Dealer financing tends to be more flexible than banks for applicants with minimal credit. Just beware of very high interest rates.

• Ask about alternative requirement options. Things like providing proof of income or putting down a larger down payment could help offset a thin credit file.

The lender may ask you to provide additional documentation beyond your credit reports, such as proof of income, employment history, monthly expenses, and collateral like a car title.

Having other signs of financial responsibility, like steady income, a stable job, and a low debt-to-income ratio, can also compensate for limited credit to some extent.

Being open to higher interest rates and less favorable terms at first can increase your chances if your credit still needs work. You may be able to refinance the loan in the future once you’ve built your credit.

Other Ways to Get a Car With Limited Credit

If you’re having trouble qualifying for an auto loan, all hope is not lost. Here are a few other options for getting car financing:

Buy from a BHPH dealer. Buy here, pay here (BHPH) dealers cater to borrowers with poor credit. They’re more flexible on approvals, but charge significantly higher interest and tend to sell lower-quality used cars. Make sure to get any promises in writing.

Lease instead of finance. Leasing depends more on income than credit score. But, leasing terms are usually 3 years or less, and you won’t own the car at the end.

Use peer-to-peer lending. Websites like Upstart connect borrowers and individual lenders. Interest rates can be high, but it’s an option if banks deny you.

Save up to pay cash. If your budget allows, save up to buy a quality used car with cash. Then you can focus on building your credit.

Ask if the seller will finance. Some individuals selling cars may be open to owner financing if you’re unable to get approved for an auto loan.

Buy at auction. Government auctions like those run by the IRS often don’t require credit checks or down payments. However, auction vehicles tend to need repairs.

Use a credit card. You may be able to charge some or all of the car cost to a credit card, but it’s rare for sellers to allow this. Also, interest rates are usually exorbitant high.

Tips for First-Time Auto Loan Borrowers

Buying and financing your first car is a big responsibility. To set yourself up for success as a new auto loan borrower, keep these tips in mind:

• Make sure the loan term doesn’t exceed the useful life of the car. Avoid 6-7 year loans on used cars.

• Read the full loan contract before signing. Understand the total cost with interest, your monthly payment, the loan term length, and any fees.

• Research the value of the car to avoid overpaying. Compare prices online for similar vehicles.

• Shop for auto insurance quotes before visiting dealerships. Account for this added monthly cost.

• Consider buying a reliable used car as your first vehicle. New cars depreciate quickly.

• Choose a used car that’s 1-3 years old and has less than 40,000 miles for the best value.

• Calculate whether leasing or financing is the better option for you. Consider your budget, driving needs, and credit situation.

• Make payments on time every month to establish a positive credit history. Sign up for automatic payments.

• Try to pay more than the minimum payment each month to pay off the principal faster and save on interest fees.

Summing It All Up

The keys to getting a car loan with limited credit history are:

• Start building credit several months or more before applying for the auto loan

• Take steps to add positive information to your credit file, like becoming an authorized user, paying bills on time, and keeping balances low

• Shop around for lenders willing to work with limited credit borrowers

• Consider options like getting a cosigner, leasing instead of financing, or buying from a BHPH dealer if you get denied by traditional banks

• Accept that you’ll likely pay higher interest rates at first until you can build up your credit

While buying a car with no credit history can be challenging, having a plan and using credit-building strategies can set you up for success. With some time and financial responsibility, you’ll be cruising around in your new set of wheels in no time.