N means No credit history? You can still buy a car
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner
It can be frustrating. You know you need to start building a credit history, but no one will give you a loan because you have no credit history. Where do you start? Many people begin with a car loan.
Here are some tips to help you get your first car loan:
Pull your credit reports
You can get a free credit report every 12 months from each of the three credit reporting agencies (Equifax, Experian, and TransUnion) at www.annualcreditreport.com or by calling 1-877-322-8228. Even if you do not have a credit history yet, it’s a good idea to check your reports and look for errors. You will want to correct them before applying for a car loan.
Gather all your information
You will need to provide the lender with as much information as you can that proves you can repay this loan. Create a folder with the following documents:
- Copies of your credit reports
- Copies of your bank statements
- Current receipts of utility bills
- Current pay stub for proof of income (or bring letter of offer for proof of future income)
- Employment verification letter as proof of employment
- Names and contact information for up to six references
- Proof of graduation (or enrollment if a student)
- Proof of military status if applicable
- Any research you have done on vehicles
Explore your options
There are lenders who may offer special financing offers for certain groups. For example, many of the major auto manufacturers have first-time buyer programs and programs for recent college graduates.
- See if your employer has a relationship with a financial institution – you may be able to have the loan amount deducted automatically from your paycheck.
- Look to credit unions for financing – they may place a higher value on maintaining a relationship with you.
- Save as much as you can for a down payment – the higher the down payment, the smaller the loan, the lower the risk to the lender.
- Consider a used or certified pre-owned vehicle. Go to reputable dealers – stay away from “Buy Here, Pay Here” lots. They charge very high rates of interest so you will end up paying a lot more for your car than it is worth.
- Consider a co-signed loan. Both signers have to be careful here. Make sure your co-signer has a good credit rating. Your co-signer will also be on the hook for repaying the loan if you cannot – not paying on your loan is a great way to ruin this relationship.
Take a realistic look at your finances
Try to keep your car payment less than 20% of your take-home pay. In addition to your car payment, you will also have to pay for auto insurance, gas, and maintenance.
- Auto insurance rates will vary based on the type of vehicle you choose, so do your homework.
- A used car may be cheaper than a new vehicle, but it will also require more maintenance.
- Consider how you will use the vehicle. If you need to commute a long way to work, you will want a vehicle that gets good gas mileage.
A car loan is considered good debt because it helps you increase your human capital. Owning a car allows you to travel farther to find a better paying job. Making your car payments on time can be just what you need to start your credit history.
Visit my Debt Management page for more information.