Shopping Smart: How To Buy a Car With No Credit

There are many ways to secure financing, including through an auto loan.

Illustration of coins being inserted into a car like a piggy bank iStock

Buying a car can be exciting—but what do you do if you haven’t yet established a credit history? Can you use a credit card? Secure a car loan? Save your paychecks? Here are a few things to consider when deciding how to pay for your car.

Save for the down payment.

If possible, save for a down payment. Putting money down will reduce your balance and your monthly payment amount, and could potentially save you hundreds in interest.

Use a credit card—but with caution.

However, if you haven’t had a chance to save, you could consider using a credit card for the down payment—or even to pay for the vehicle in full. Proceed with caution, though, because credit card interest rates can be high.

Current rates are around 16.65%, which is significantly higher than the rate you‘d pay if you took out a 60-month loan.

Also, remember that when you use a credit card, the dealership may pass on their processing fees to you—which could be 2% to 4% of your transaction. For a $10,000 purchase, that’s an additional $200 to $400.

Get a loan from a lender.

Securing a car loan can 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.

Some bank lenders will work with you even if you haven't yet established a credit history. In this case, you’ll need to prove you have a steady paycheck or income in order to secure a car loan.

Credit unions are another place to check, as they often have lower interest rates and fees than banks do. In addition, some lenders and car manufacturers have programs for recent graduates that provide them with special financing.

Successfully taking out a car loan, making your payments on time and closing out your loan by owning your car outright all help establish your credit history and boost your credit score. A credit score of 720 can help you secure better interest rates on future loans, including a mortgage.

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