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."
