If you don’t use credit or just started building it, chances are you
have no credit file or maybe just a thin one — it’s there, but there’s
not much to it. That can leave you with a low credit score or no credit
score at all, which may make it difficult to get credit when you need
it.
A thin credit file is a common obstacle consumers encounter when
trying to buy a car. The vast majority of American households have a car
and people overwhelmingly rely on their cars to get to work, but unless
you have the cash to cover the cost of your next car, you’ll need to
finance it. It can be tricky to get an auto loan with an interest rate
you like when you have no or thin credit, but there are a few things you
can do to improve your chances of finding affordable financing.
If the car isn’t an urgent need but you know you’ll need a new
vehicle in the next year or so, start trying to build credit now. One of
the easiest ways to build credit is to get a secured credit card, spend
very little of the credit limit and pay off the bill on time and in
full every month, so you establish a history of on-time payments and
responsible use of credit, without going into debt. Before you apply for
a card, compare secured credit cards to learn about interest rates and any fees you may have to pay.
If you’re just starting out and have a credit history that’s less
than 6 months old, try to remain patient while sticking to the basic behaviors of good credit, like making on-time payments, and give your credit score time to grow. You can see how you’re progressing by getting an overview of your free credit report every 30 days on Credit.com.
It’s not uncommon for someone’s first big purchase — one that needs a
loan — to be a car, and there financing programs designed to meet that
population’s needs. If you already have a relationship with a bank or
credit union, that could help you get financing, too.
“They’re going to look at you just a little bit differently, because
they know this is the first time you’re borrowing,” said Yvonne
Sambrano, senior lending solutions manager for EPL Inc., a technology
firm that works with credit unions.
Auto finance companies have these programs, too, but you may
be able to get a lower interest rate if you go to a local bank or credit
union, particularly if you’ve done business with them before. Make sure
you have as much documentation of your financial stability — proof of
income, bill statements, etc. — to make your case to a lender.
The use of non-traditional credit information has become much more common in the lending world, even within the major credit reporting agencies.
Creditors have many tools at their disposal to qualify you for a loan,
so ask potential lenders what sort of alternative data they use to
assess creditworthiness. You might be able to find a lender that uses a
credit score or credit report that looks further into your credit
history or considers things like utility payments in making lending
decisions.
You could also take the initiative to build a credit report by
working with an alternative credit bureau (eCredable is one example)
that can help you use payment history on your regular bills, like your
rent or cellphone, to get an auto loan
When you ask someone to co-sign a loan, you’re asking them to risk their credit standing in order to help you — so you’re asking a lot. Still, if you don’t have many options for financing a car
you need, it’s one way to make things work. Remember that if you miss
payments on the car loan, you’ll bring that friend or family member down
with you.
Any of these options tends to take a little bit of planning, so don’t
wait for your current vehicle to die to figure out how you’ll pay for
your next one. Even if you know you’ll need to finance some of it, try
to save up for a down payment, because that can help you get loan
approval or snag lower interest rates, which will save you money in the
long run.
