Why for most buyers with questionable credit it usually takes more than a good payment history with a credit card to establish car credit and apply for a conventional auto loan
Exploring the possibility a car loan with a credit union first can sometimes result in a lower monthly payment for consumers without a credit history or with poor credit
What We Know
To either regain or establish auto credit car shoppers with problem credit may need to apply for a car loan with a higher-risk lender, or other lenders that work with problem credit or no credit history borrowers. This often means going through a subprime lender or starting your loan process at a credit union.
A subprime lender is a lender who is equipped to handle unique credit situations, such as borrowers with no credit history. These dealerships are signed up with lenders who look at more than just your credit score to help get you approved for financing. Over the years, we've fielded thousands of questions from credit-challenged consumers who want to know if they can get a car loan without a credit history.
Many of them also want to know if a solid payment history with a credit card will allow them to apply for a conventional auto loan. And while this can help improve your credit, having established credit via credit card isn't the same as having a solid history of repaying an auto loan. Below we go over why subprime lenders can help.
One other option to try before heading to the dealership is a credit union if you're a member. Although it doesn't always result in an auto loan approval, consumers that have experienced problem credit and belong to a credit union at least owe it to themselves to try this option first. This is because these loans can be easier to come by, and often carry cheaper interest rates than loans from banks.
Here at Auto Credit Express, we know this is typically the case because we've spent over twenty years helping car buyers with bad credit search for online auto loans and find those car dealers that can offer them their best opportunities for loan approvals. Our experts also know the ins and outs of auto financing and can offer advice on what has worked for other clients over the years.
High Risk Lenders For Getting a Car Loan With No Credit History
Applicants with problem credit often wonder why it should even be necessary to apply for a car loan from a subprime lender. After all, paying cash for a vehicle while, at the same time, making regular payments on a traditional or secured credit card will typically improve the cardholder's credit scores.
But the fact is this probably won't bolster the auto credit of these individuals, even if it improves their FICO scores.
The reasoning behind this is that a credit card is a type of revolving credit. With revolving credit, if you don't pay off your card balance every month, account holders can pay the minimum amount and carry over any remaining balance to the next month.
An auto loan, on the other hand, is a form of installment credit. With installment credit a contract is signed that requires the account holder to pay back the initial amount, plus interest, for a fixed payment each month over the loan term.
Another difference that separates installment credit from revolving credit is the fact that installment loan balances are usually higher than most typical revolving credit limits. Installment loans also carry a higher monthly payment as a percentage of the loan balance and are much less flexible to changes. This means consumers with installment loans have to be more disciplined.
In determining your credit scores, FICO and other scorers look at both types of credit – revolving and installment. Automotive lenders look at both credit types but also pay special attention to how applicants have paid on installment auto loans. So while a good payment history with a credit card typically will help credit scores this type of activity doesn't carry as much influence when applying for an auto loan.
For this reason, even auto loan applicants with decent credit scores are sometimes turned down if they've never had one or if it turns out they had a spotty payment history with a previous car loan.
What this means is that consumers that find themselves in these situations might have to first establish car credit with a lender that's willing to take a greater risk.
Requirements for Getting a Car Loan at a Subprime Lender With No Credit History
Subprime lenders often look at more than just your credit score to help establish whether a borrower is worth the risk of lending to. These requirements show the lender that you have the stability, ability, and willingness to take on an auto loan. You must provide proof of your income and employment, as well as present proof of residency and proof of a working phone. You also need a list of personal references that can help verify your information and last as a backup in case the lender is unable to contact you.
Credit Unions For Getting a Car Loan With No Credit
While it isn't typically the case, we have seen situations in which credit-challenged consumers have received approval for a car loan from their credit unions. But at the same time, many car shoppers are both unfamiliar and confused over what credit unions are and how they operate. To understand how credit unions work you first have to know what makes them different from banks.
Unlike most lending institutions that are publicly owned corporations, particularly large banks, credit unions are nonprofit organizations owned by their member customers. Since they're member-owned and don't have to worry about answering to stockholders about profits, they can typically price their loans more aggressively than banks. This means that, typically, credit union car loans feature lower interest rates than comparable auto loans offered through banks.
We use the word "typically" because this is not always the case. That's because some credit unions act more like banks while some very large banks, because of their size, have the ability to offer customers very competitive interest rates on auto loans.
Another common difference between banks and credit unions is the personalized service you can expect. Since credit unions are usually smaller with fewer employees, the service you receive is usually more personal.
Balancing this is the fact that banks because they are usually larger, can offer more amenities such as online and mobile banking as well as automatic bill pay for loans and utility payments. Banks are also more likely to feature additional perks such as 24-hour customer service hotlines. However, many credit unions are now getting these abilities, too, especially in this day and age.
When it comes to charging their customers fees, however, banks are notorious for tacking them on to everything from checking accounts, overdrafts, and ATM machines to teller fees and falling below minimum balance requirements for savings, checking, and investment accounts.
In comparison, most credit unions shine in this area. While credit unions will typically charge their customers for overdrafts or returned checks, they usually back away from charging checking, savings, or teller fees. ATM withdrawals are, in most cases, also fee-free unless the machine being used is outside their network. And even though they are local, many participate in one or more nationwide networks of credit union ATM machines that allow members to use any of them at no additional charge.
Requirements for Getting a Car Loan at a Credit Union With No Credit History
Applying for an auto loan at a credit union is easy, although it usually has to be done in person. In most cases, you must live in the area served by the credit union. Unlike banks, credit unions usually require you to become a member before applying which means you'll first need to open a savings account (called a share account).
The most important thing to remember is that if you have poor credit you may not qualify for a credit union car loan – although applicants without a credit history usually have a better chance. This is because, unlike those new car dealers that work with lenders that offer higher-risk car loans, credit unions typically don't approve applicants with the lowest FICO scores.
So what should you do if you're turned down for an auto loan at your credit union? We're glad you asked.
What We Do
The first thing you should know is that, in most cases, you have a choice other than a BHPH dealer. Secondly, we want you to know that Auto Credit Express specializes in helping borrowers with bad credit find those dealers that can give them their best opportunities for auto loan approvals. So if you're ready to reestablish your car credit, you can begin now by filling out our online auto loan request form now.