No credit check vs. subprime auto financing
Should you go the no credit check auto loan route or is subprime auto financing the best option? We compare the benefits and drawbacks of each.
No Credit Check Auto Loans
No credit check auto loans can be a good option when you're looking to buy a car. You can skip the process of a credit check altogether and seek financing through a no credit auto loan dealer. Benefits of no credit check auto loans include:
- No credit check - This is one of the best features about a no credit check auto loan, there's no credit check required. Pulling your credit history could impact your credit negatively, but you can avoid this since there's no credit check.
- Online application and little paperwork - The entire process for a no credit check auto loan involves very little paperwork. Simply fill out and submit an online application form before getting approved. After completion, your application could be ready within just a few hours.
- Almost anyone qualifies - Since no credit check is required almost anyone can qualify for this type of car loan. You don't need to share the status of your personal credit history.
- Keep your information private - Since there's no credit check, you don't have to turn over tons of personal information. This makes the no credit car financing process much more private.
Subprime Auto Financing
A subprime car loan is for anyone who has a low credit score of about 620 or lower, or an inconsistent credit history. Benefits of subprime auto financing include:
- Simple monthly payments - Your monthly car payment amount can be paid directly to the dealer who you bought your car from, often without working with a third party. This is called in-house financing.
- Quick and accessible funding process - With a subprime auto loan all you have to do is prove you have a reliable source of income, then the funding process is usually quick and easy.
- Reasonable interest rates - Many lenders have lowered their subprime auto financing rates making interest rates often more reasonable, than no credit check loans.
No Credit Check vs. Subprime Auto Loans
As someone with no credit, or bad credit, you have options to get approved for a car loan with a decent interest rate. But before applying for such loans, here's what you need to know.
- Credit check required - One of the main differences between these two type of financing options is that you'll have to submit to a credit check with a subprime auto loan. A no credit check deal allows you more privacy while a subprime auto loan requires a credit check to qualify. When comparing no credit to subprime, subprime financing is often the better choice if you want to rebuild your credit.
- Be prepared for a background check - The majority of no credit car dealers will want to verify who you are and your financial situation by performing a quick background check before approving you.
- Interest rates will likely be higher - The interest rate you'll pay with a no credit check auto loan or subprime financing, will likely be significantly higher than a traditional auto loan.
- Shop around to compare rates - To find the lowest interest rates and best auto financing options for your situation, take time to shop around, compare rates and ask for multiple quotes.
When comparing no credit check vs. subprime auto financing you'll want to choose the one that you feel best fits your financial situation. If you have extremely poor credit, or want to keep it private, then a no credit check auto loan is the best option. Otherwise subprime financing is great if your credit score is 620 or less.
10 best ways to establish your credit
Building up your credit from scratch seems impossible at first; it's hard to build up a credit score without a credit card, but having no credit means you can't get a credit card in the first place. Getting a mortgage or an auto loan at a good interest rate depends on your credit history--no credit auto loans and no credit financing can be hard to find, so it's important to start establishing credit as soon as you can. If you're starting from no credit, here are the best ways to do it.
- Check your credit report. You can get a copy of your credit report from one of the three major credit bureaus (Experian, Equifax, and TransUnion). Check to make sure you truly have no credit history--a gym membership or a student loan from the past may already be there. Or if there's a false credit report open in your name when you should have no credit, contact the credit reporting agencies immediately.
- Take out a loan. Loans build up your installment credit when you have no credit, and reflect positively on you later on when you're applying for other types of installment credit, like a mortgage or an auto loan. Banks and other lenders offer small loans for personal reasons, and if you can make your case, they'll often give you no credit financing.
- Report your rent. Experian and TransUnion include rent payments on your credit report when you upload them by a third-party service like RentalKharma or RentReporters. The payments will show up on your credit history, and even though they don't contribute to your credit score right now, they still help build you up from no credit.
- Pay your bills on time--and put them in your name. Many major utilities, internet, and phone providers are beginning to report all payments. You can call your provider to see if they do, and even if they don't, you can request a letter of reference to show a potential creditor when you're applying for a loan.
- Open a bank account. Checking and savings accounts aren't included on your credit report, but lenders sometimes ask for that information in credit card applications. Also, having a good relationship (no overdrafts, no bounced checks) with your bank or credit union can pave the way for financing opportunities even when you have no credit.
- Get a credit card. There are three main ways to get a credit card with no credit: apply with a cosigner, get a secured credit card, or get a retailer credit card. A cosigner puts his or her credit at risk to help you when you have no credit, so it's important to find someone you have a good relationship with. A secured credit card is connected to an account you deposit cash to, so your purchases are always backed by your balance and there's no danger of going into debt. Retailer credit cards generally have less bearing on your credit report, but they are also easier to obtain. If you have a good relationship with your bank, it might be possible to apply for a card from them with no credit.
- Avoid opening too many accounts. Also, keep your existing accounts open as long as possible and use them regularly when you have little or no credit. Active accounts boost your payment history, while opening multiple accounts decreases your average account age and causes credit penalties. Unused credit accounts are closed by issuers sometimes after periods of inactivity, which means your length of payment history goes down.
- Understand the FICO credit score. The FICO score is one of the most common credit scoring models, and it's based on five factors: payment history, credit utilization, length of credit history, types of credit in use, and new credit. Keeping the five of these in mind and knowing how they affect your credit will help you make decisions in the future about taking out loans, closing credit cards, and making payments.
- Keep your job. Employment, along with credit score and history, is required by most lenders, and they prefer to see one employer especially if you're applying for no credit financing. If you're not working, you'll have to have another source of income to apply for financing.
- Use your credit regularly and responsibly. Your credit is an ongoing process after you take off from no credit, and it's important to maintain it. Pay your credit cards and loans on time, and check your credit reports every year for mistakes or discrepancies.
No Credit vs. Bad Credit Financing
What do people with no credit and bad credit have in common? Both groups of consumers may struggle to find financing for an automobile purchase. However, there are other non-traditional options available. Here's how the financing is different:
No Credit Car Financing
If you’ve been denied an auto loan because you have no credit or minimal credit history, you may want to consider a dealer that specializes in no credit car financing. No credit car dealers understand that you are a credit newbie and may be willing to take a risk on you in exchange for a higher return in the form of interest.
Bad Credit Car Financing
Having bad credit isn’t the end of the world, but you may find it extremely difficult to secure financing. Since lenders can see how you handled debt products in the past, they may not be convinced that you’ll treat their loan any differently. The good news is that there are lenders that specifically focus on financing with bad credit.
Which Is the Better Option?
From a lender’s perspective, applicants with no credit may be viewed more favorably than those who have an extensive history riddled with financial missteps. Unfortunately, you will only qualify for high-interest loans that are designed for individuals with bad credit.
If you have no credit or bad credit, building your credit score is the key to securing affordable financing offers on your next vehicle securing other important loans in the future.
How to Get an Auto Loan With No Credit
Owning a car these days is a basic necessity. We need it to commute to our jobs so we can pay the bills, and take our kids to school and other social activities. What happens when you're trying to buy a car but don't have any credit?
Having no credit means that you simply don't have a history of borrowing funds and repaying them over the long-term. It's not that your credit is good or bad, it just doesn't exist yet.
If you're hoping to get an auto loan with no credit, here are a few steps to take. Consistently making on-time payments on a car loan will help increase your credit history over time. This will in turn, assure lenders you know how to manage credit and get you on the right financial path.
Step 1: Put at Least 10% Down
When trying to get an auto loan with no credit the more money you can put down the better. The lender will view you as less of a risk and help find you a great deal on a no credit auto loan.
At the very least you want to pay a 10% down payment, but obviously if you can pay more, then do so. Any amount you pay upfront will mean less interest and fees you'll have to pay over the lifetime of the auto loan.
Step 2: Shop Around and Negotiate
Just because you have no credit doesn't mean you don't have options. Before taking out an auto loan with a local dealership, check with area banks and credit unions or dealers who specialize in no credit auto loans. Shop around and get financing offers from different sources in order to be sure you're getting the best rates and terms.
Credit unions and local banks are smaller and therefore are a bit more flexible on their auto loans and open to working with individuals directly. Search for financial institutions who often issue loans to newer borrowers. Buy Here Pay Here lenders specialize in no credit and bad credit auto loans and may give you the best loan terms after being turned down from a traditional lender or dealership.
Talk to different dealers and bank representatives to see who is able to offer you the best loan options and interest rates. Securing a no credit auto loan will often come with a high interest rate, but will help build credit for better terms on future loans.
Step 3: Reduce the Length of the Loan
Choose a monthly auto loan payment amount you can easily afford. Pushing out a car loan for a full six years, or longer, may help reduce your monthly payments but it could force you into a financial bind in the short-term.
You don't want to owe more than the car is worth as the years go by, or even need a new vehicle before your previous one is paid off. Having a shorter loan term will also allow you to save money on interest payments, as well as reduce your perceived risk to a no credit financing dealer.
Step 4: Find a Co-Signer
If you find that you're still having issues getting approved for an auto loan, you may want to consider finding a co-signer to help. Ask a close friend or family member to co-sign the loan with you, putting you as the secondary borrower. This will help boost your attractiveness to lenders and no credit car dealers.
Make sure you go over all of the details of your loan with your cosigner and make your payments on time to avoid a hit to both of your credit scores. Clarify the details of your auto loan so there are no misunderstandings. You don't want to get into an argument over finances, or the rightful owner of the vehicle with your co-signer.
Step 5: Bring Proof of Employment
While shopping around for an auto loan with no credit, bring proof of your current, or future, employment as this may help your case. A Buy Here Pay Here dealer, for example, will view your income as a means of paying back your loan quickly.
Your employer could also be a good character reference, as well as any past or future employer. So bring any copies of past tax returns or pay stubs to help reduce your risk as a potential buyer.
There are plenty of no credit car financing options and lenders who will give an auto loan to first-time borrowers. You just have to be patient and take your time negotiating the best deal.