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AAA provides a car-buying service that you can use to find your next new or used car.
Car shopping can be exciting, especially if you’re buying your first vehicle, but qualifying for a loan can be frustrating if you haven’t established a credit record. Why? Having no credit means you are an unknown risk to a lender, so even when you qualify for a loan, you’re likely to get one with a higher-than-average interest rate.
Fortunately, there are ways to turn things to your advantage. This story reviews some important Do’s and Don’ts that can help you buy a car, even if you have bad credit or no credit history.
The key to successful car buying comes down to how much preparation you do before you start shopping. Here are six important steps to take.
1. Check your credit report.
The first thing to do before you start shopping for a car is to find out if you have a credit score. Three major consumer credit reporting agencies (Experian, Equifax and TransUnion) collect and track your financial data—including your payment history, length of credit history and how much of your revolving credit limit you’re currently using—to create a report of your financial activity and calculate a score that reflects your financial reliability.
You can pull your credit report from each of the three reporting agencies for free by visiting AnnualCreditReport.com or Experian’s freecreditreport.com, where you’ll get instant online access to your free Experian credit report and FICO credit score.
2. Limit the number of times your credit gets checked.
Avoid visiting multiple car dealers and having your credit score checked repeatedly. Having lots of inquiries generally won’t lower your rating, but it can raise flags when you apply for a loan. Rather than visiting multiple dealers, find one that helps people with bad credit (such as with special finance managers) and has transparency (such as posting all car prices online).
Learn the keys to getting the best deal when buying a new car from The Art and Science of Car Buying, part of AAA’s exclusive Well Worth It webcast series.
Watch Now3. Bring important financial documents with you.
An organized folder of pay stubs, bank statements, W2s and 1099s will help the loan process go smoothly. Make sure your driver’s license, bank statements and insurance are all up to date with your correct address.
4. Be flexible with your car choice.
You probably won’t qualify for a loan on a luxury vehicle, sports car or other high-end vehicle, but those aren’t appropriate choices for someone with no credit anyway. Instead, choose from cars that are reliable, fit your budget and suit your transportation needs.
5. Make a sizeable down payment.
A down payment of only $500 or $1,000 won’t yield a favorable loan. Start saving before you shop and do what you can to pay 20% or more of the sticker price up front; you’ll borrow less money, and you’ll get a better rate. A trade-in vehicle is another form of equity that will reduce what you need to borrow to buy your new car.
6. Keep monthly payments low.
Avoid taking a loan where the monthly payment is more than 50% of your gross monthly income. Spending too much of your monthly income on a car payment leaves you vulnerable to emergencies and other unexpected expenses.
Having your loan co-signed by someone who has established good credit can reassure the lender that your debt will be paid. Family members or trusted friends can be co-signers, tipping the scales in your favor to get approval and a good interest rate. Just remember: Co-signers will not share ownership of the car, but their signature on your loan is a promise to cover your debt if you’re unable to make payments.
Corporate lenders always require a credit check for a traditional car lease, but there are alternatives. If you’re looking for a no-credit approval car lease, you should consider programs like rent-to-own dealers or flexible car subscription services. You won’t own the vehicle with a car subscription service, but your recurring fee will include costs like maintenance and insurance, and you’ll likely have the option to cancel or swap cars to fit your needs.
Purchasing a vehicle is a big step—a new car means freedom to travel, and it will also help to build your credit score (as long as you make your payments on time) and pave the way to better rates on future loans, mortgages and financing.
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Join Today!Yes, you can—but it takes some preparation. With no credit history, lenders consider you an unknown risk, which often means higher interest rates. Before you start shopping, pull your credit report for free at AnnualCreditReport.com to understand where you stand. From there, you can take steps to strengthen your application and secure a better deal.
A few key steps can make a big difference. Save for a down payment of 20 percent or more, keep your monthly repayments below 50 percent of your gross income, and bring financial documents like pay stubs, bank statements and W2s to streamline the loan process. It also helps to find a dealer that specializes in working with buyers who have limited credit history.
A co-signer with strong credit can significantly improve your chances of approval and help you secure a lower interest rate. Just keep in mind that while they won't share ownership of the car, they will be responsible for repaying your debt if you can't make payments.
Focus on reliable, affordable vehicles that suit your everyday needs. Luxury or high-end cars are unlikely to be approved for financing, and they're not the smartest choice when you're building your credit profile.
Traditional car leases require a credit check, so they can be difficult to access. However, rent-to-own programs and car subscription services offer flexible alternatives. With a subscription, you won't own the vehicle, but your recurring fee covers costs like maintenance and insurance—and you may be able to cancel or swap cars as needed.
Yes! As long as you make your payments on time, a car loan can help establish and grow your credit score. That sets you up for better rates on future loans, credit cards and mortgages.
expect something more
AAA provides a car-buying service that you can use to find your next new or used car.
