Can You Buy a Car With No Credit?

You can buy a car with no credit but you may have fewer financing options available and will probably need to do more legwork and get more creative with your approach. Financing a car purchase as a first-time car buyer can be challenging because lenders aim to minimize their risk — and they generally interpret their risk level based on the borrower’s credit score.

If you’re unable to provide this, it will be difficult to show that you’re a responsible borrower, and you may be considered “high risk”. This can make loan terms unfavorable (higher interest rates) and difficult to meet as a first-time buyer. Here’s a closer look at why credit is important and how you can get a car with no credit.

What is credit? 

Credit allows you to borrow money or sign a financial contract with a supplier to buy something of value, agreeing to repay what you have borrowed (usually with interest).

Lenders are highly reluctant to risk losing money so the credit history and credit score system helps them determine risk levels when assessing loan applicants.

To understand more about credit, it helps to familiarize yourself with some key terms that you may come across during the process of buying your first car.

• Credit history - A record that demonstrates how well you manage debt, compiled into credit reports visible to lenders by three credit bureau agencies: Equifax, Experian and TransUnion.
• Credit score - A three-digit number that gives a lender an instant picture of your credit history (the higher the score the less the perceived risk). 
• FICO score - The most common scoring model, using a scale from 300 to 850 to assess an individual’s creditworthiness. 
• “No credit” - When an individual has no credit history due to previous inactivity (no debt payments made within the last six months), they have no record with the credit bureau agencies and are categorized as “credit invisible” with no credit score.

Can you buy a car in full without credit?

Young people or students who haven’t yet established a credit history are the most common car buyers to face the “no credit” challenge. However, retirees, immigrants and US citizens returning from a period abroad often face the same challenge of credit invisibility.

“No credit” individuals can still buy a car in full without credit but will face more challenges than a person with a good credit score of 700 or above. These challenges include:

• Finding a lender that will accept the higher risk you represent
• Higher monthly payments 
• More interest paid over the term of the loan
• A potentially longer loan term (up to 96 months)

The challenges of finding a reasonable car loan with no credit are similar to those experienced by perceived unreliable borrowers with “bad credit”. The solutions are also similar — finding alternative financing options and building your credit over time. We’ll go deeper into these shortly.

What is the lowest credit score to buy a car? 

There is no minimum credit score needed to purchase a car but a score above 600 is generally preferred by lenders for traditional auto loans. You should aim for a credit score of between 600 and 750 to secure favorable loan terms.

Is no credit better than bad credit? 

Having no credit is generally considered better than having bad credit. That’s because no credit means uncertainty as to your potential reliability as a borrower whereas a bad credit score is proof that a borrower has not been a reliable debt payer in the past — possibly with late payments, delinquencies or even defaults. Generally speaking, it’s easier to start building credit from scratch than repairing bad credit.

How to buy a car with no credit

You now know more about the importance of building a healthy credit score but what can you do if you need to get a car now and you have no credit? To give yourself the best chance of getting a loan deal that you can afford — without terms that are impossible for you to meet — think about taking the following steps:

1. Seek alternative financing 

Banks may not be your best option for an auto loan with no credit. You can try to show that you are financially responsible in other ways, such as demonstrating a consistent income and/or regular on-time rent payments but it may be best to look elsewhere at other financing options. Typically, your best options will be:

• Credit unions - Often, credit unions are more flexible and approachable than banks and they sometimes offer credit-builder loans that help borrowers with invisible, thin or poor credit profiles improve their standing (these may not be advertised so you may have to ask).
• Online lenders - Borrowing criteria vary but online lenders may offer loans to buyers with little to no credit history. Be wary of excessive interest rates from predatory lenders but, on the plus side, decisions with online lenders are usually made fast.
• "Buy here, pay here" financing - These auto loans are offered by dealers but be wary of high interest rates and unscrupulous dealership policies. On the plus side, some dealers offer special options and more flexible loan requirements for borrowers with thin credit profiles. Shop around and read the small print before committing.
• Secured auto loans - This type of loan uses collateral (typically the car itself) as security, meaning that the lender’s risk is reduced. The car or other asset that secures the loan can be repossessed if the borrower defaults on the loan.

2. Find a co-signer

Anything you can do to reduce your perceived risk to a lender should help you get a better loan deal. One way to do that is to find a co-signer for your loan agreement. Typically, this is someone of good credit standing who you trust (and who trusts you) and who can act as a type of “guarantor” for the loan. This could be a parent or other family member with a good credit score that may help you qualify for a lower interest rate. 

If you fail to pay back the loan, the co-signer will be liable for the debt and this could end up damaging the co-signer’s credit history. So, choose well and make sure the co-signer understands the risks involved.

3. Keep saving for a large down payment

When you look into car loans, you’ll notice how the terms change depending on the size of the down payment. A larger down payment can help you get more equity in your vehicle and lower the amount borrowed. In turn, this may help you secure a better interest rate and lower monthly payments because you are less of a perceived risk to the lender. Unless you’re in a hurry to get your car, it may pay to save a little longer for a larger down payment.

4. Shop around for the best rate 

If you have no credit, a good loan deal is unlikely to land on your plate. It will probably take a little legwork to find a loan that works for you. The more shopping around and loan comparisons you do, the more likely you are to get lucky. You have many online resources that make this process much easier than it used to be so there are no excuses for not doing your car loan homework.

5. Build up your credit 

If you don’t plan on buying your car for a while, you can follow the tips on how to build your credit score so that you are no longer “credit invisible”. These tips include applying for a secured credit card and paying balances off on time and establishing a credit history by taking out a credit-builder loan with a credit union.

Also, consider becoming an authorized user on someone else’s credit card. Check if this is possible with the card issuer and bear in mind that you should only consider this if the person in question is a reliable payer — or it may reflect negatively on your credit. Whichever accounts you open to build your credit history, be sure that payments are reported to the major credit bureau agencies each month.

6. Pay cash to a private seller

Another way to buy a car with no credit is to simply pay cash in full to a private seller — either advertised online, in the neighborhood or through a friend or relative. This will not be for all buyers — and may be purely for those in no hurry as it is likely to take time to save the funds to buy the car. Getting an interest-free loan from your parents, for example, may help.

Be aware of the risks with this. Scams and unscrupulous sellers abound so ensure that the vehicle is inspected by an independent mechanic before you commit. To pay safely in cash, use a cashier's check or escrow service and make sure that you never give out private banking or personal information.

Is there a simpler way to get the car you want?

You can buy a car with no credit but you’ll face challenges that people with a good credit history and credit score don’t face. Do your homework, shop around in different places for loans (not just the banks or dealerships) and get more creative by finding a co-signer for your loan, saving for a larger down payment, demonstrating creditworthiness in other ways and taking steps to build your credit.

Final thoughts

If buying a car is proving difficult because of a lack of credit or poor credit history, there may be another option you’ve not considered. Car leasing and subscription options are often great alternatives to buying.

A car subscription can often be arranged even with no credit. You pay a fixed monthly fee and enjoy the flexibility of changing the car you drive as often as you like. An car subscription with FINN is a fast and convenient way to get the car you want. Insurance, registration and roadside assistance are included — all for a fixed monthly fee.