Buying a new car with no credit

There are several mileposts of mobility that we hit as we're growing up. Those toddling first steps. Learning how to ride a bike. And perhaps most liberating of all, getting a driver's license.

But the true moment of freedom is not when we are able to borrow the keys to the family sedan. Instead, it's when we are able to purchase a car of our own. Suddenly the road to true independence looms in front of us, as we prepare to drive off into life.

The problem is, buying a car is one of the most expensive purchases a person can make, certainly for a 20-something-year-old who is just starting out. At that point in life many people have yet to establish any sort of significant credit record. Without it, how do you finance a purchase that can cost tens of thousands of dollars?

Buying a Car with No Credit History vs. Bad Credit: There's a Difference

The first thing to remember is that having no credit history is not the same as having bad credit. It is not necessarily a strike against you. Lenders understand that young adults just starting out may have no credit history, and one of the best ways to establish a solid credit record is to make prompt payments on a loan over a lengthy period of time, which is exactly what a car loan entails.

Provide Proof of Earning Potential

When applying for an auto loan, you will be asked to provide evidence that you have the financial resources and stability to make the monthly payments. So be prepared to show proof of income, length of time at your job, bill payments, length of time at your residence, and even personal references.

Use a Co-Signer

Having a co-signer for the loan, if possible, also is a way to overcome the lack of a credit record.

Get Pre-approved

Since dealerships obviously want to sell cars, they will usually try to work with buyers who have no credit history. But it usually is better to get pre-approved for a loan from a bank or other lender before you ever set foot on a car lot. This way you know in advance what you can and can't afford, enabling you to approach your purchase with a firm price range in mind.

Seize the Initiative

In addition, being pre-approved gives you something to use in your negotiations with the dealer. It helps convince them that you will be able to make the loan payments, and it also can provide an incentive for the dealer to offer a lower interest rate. As the century-old, car-valuation service Kelley Blue Book states, you don't want to be negotiating with a finance and insurance representative at the dealership who "is holding all the cards."

"The deck – if you will – is stacked against you. Better to talk with your bank and line up your financing in advance. You can always go with the dealer option if it's competitive. But never approach it as if the dealer is the only money game in town."

After comparing prices and going on more than a few test-drives, you’ve finally picked out the perfect vehicle for you. All that’s left is signing on the dotted line. But wait, there’s a problem. You’re in need of a car loan, but you have no credit history. Are you at a dead end, or can you buy a car without a well-established credit score?

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Getting behind the wheel

Unfortunately, having no credit history makes purchasing a car much more difficult. When getting approved for a car loan, lenders take into account your credit score as an indication of your ability to make your payments. (Not sure what your score is? You can get a free credit score from NerdWallet.) If you don’t have an established credit history, you’ll likely be viewed as a riskier candidate for a loan, and you'll pay much higher interest rates than someone who has a long history of on-time payments.

Pedal to the metal

But before you hit the brakes on your dream of a new car, here are a few options for buying a car with no credit history:

• Co-sign. You’re more likely to drive away with a loan if you find a co-signer who has good credit. In co-signing, someone agrees to add his or her name to your car loan. The co-signer is thus taking on the responsibility of being equally on the hook for payments in the event that you don’t pay them on time.

• Increase your down payment. The likelihood of getting approved for a loan depends on the size of the loan. If you put up a larger down payment, you may have a greater chance of getting approved for the now-reduced loan amount.

• Find the loan for you. Depending on your current situation, you may have expanded options. Some lenders, for example, offer loans to students who are still in school and don’t have any credit history. Check for such specialized accommodations that may apply to you.

So, the short answer is yes, there are ways you can buy a car with no credit history.

Down the road

Of course, getting a loan on your new ride is much easier if you can show your potential lender that you have good credit history. If you’d like to start establishing yours, and perhaps put off that vehicle purchase for a little bit while you build your credit. It just takes a little work: making payments on time, keeping your debt low and monitoring your credit score, among others. You could also ask someone to add you as an authorized user to a credit card or you could take out a credit-builder loan to get yourself on the credit radar. If you’re considering applying for a first-time credit card, use NerdWallet’s credit card roundup to find the best credit cards for people with no credit history.

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