Now that you’re an adult, you may find that you need a car to get to work or classes. If you’ve never applied for credit, getting approved for an auto loan can be a challenge, especially if you haven't been building credit from a young age. Although there are ways to get a car loan with no credit history, it pays to be prepared before you dive in.
Understanding the Legal Requirements
You can't apply for a loan for a car before you turn 18 years old. You can’t legally enter into a contract in the US until you reach the age of 18, which makes it impossible to finance a car on your own when you become a legal driver at 16. Getting a loan requires signing a legally-binding contract with a lender. In the US, you're a minor until you're 18, which is the age of majority. Minors can't sign a legal contract, so being 18 is among the most basic auto loan eligibility requirements.
The Role of Credit History
Having a strong credit history and credit score are the keys to getting approved for credit cards, loans, mortgages, and more, making it easier to access the big-ticket purchases often needed in life. Better yet, having good credit allows you to qualify for better rates and terms on these accounts.
That’s not all credit impacts, either. Your credit can play a role in how much you pay for car insurance, your ability to get a job or rent a place to live, and if you qualify for utilities or a phone contract.
Creditors, lenders, and others who use your credit to make decisions will look at your overall credit profile but will pay close attention to your credit score – a three-digit number that provides a snapshot of your ability as a borrower at a moment in time. FICO is the most common credit score in circulation and the one used by most lenders. Your FICO score ranges from 300 to 850, with anything 700 and above typically qualifying as "good."
Credit score providers are a little secretive about what exactly goes into calculating your rating, but they do provide an overview. The five main factors that go into your credit score are payment history, length of credit history, amounts owed, your mix of credit accounts, and new credit.
Of these, your payment history and amounts owed – which largely deal with your credit card balances compared to their limits – account for over 65 percent of your rating, making them the two most important by far. This means focusing on these two areas is also the best way to build credit.
Challenges Faced by 18-Year-Olds with No Credit History
While you have to be 18 to get a loan for a car, it's also in your best interest to wait until you're no longer a minor. Auto lenders qualify borrowers using their credit and income, and younger borrowers can have trouble meeting their standards.
- Credit – If you're under 18, you likely don't have much of a credit history. Lenders look to your credit reports and credit score to examine your ability as a borrower, as well as to determine if you qualify and on what terms. If you have little or no credit history, you'll have a tougher time getting approved and will likely only qualify for a higher interest rate if you are.
- Income – Lenders also base approval on your ability to repay the loan, and many young drivers don't have the necessary income to qualify. You can expect most special finance lenders to require you to make a minimum of $1,500 to $2,000 a month before taxes. Lenders also look for your income to be steady, so they may require you to have a certain amount of time on the job. These income and employment rules are a tough obstacle for younger borrowers to overcome.
How to buy a car as an 18-year-old?
Even after you turn 18, getting approved for a car loan can still be challenging due to the credit and income qualifications described above. However, if you need to get a loan there are many programs and solutions out there to try such as first-time buyer programs, getting a cosigner, or visiting a subprime lender. Here is some more information about these things to try if you're trying to get auto financing:
First-Time Buyer Programs
- Many auto lenders offer loans specifically designed for buyers with limited or no credit history. These are good because you won't need a cosigner to qualify, but the interest rate will likely be higher due to your lack of credit. You should ask your local bank or credit union about the possibility of getting financed before applying for a first-time buyer program elsewhere.
Utilizing a Cosigner
- Having a parent, relative, guardian, or friend with good credit cosign on the loan can improve your chances of qualifying, and may even help you get a better interest rate. Be aware that the cosigner is legally obligated to pay back the loan in the event you don't, and their credit can be negatively impacted if the loan isn't paid as agreed.
Specialized Lenders and Dealerships
- Specialized dealerships typically have special financing departments that can be key to getting a loan when you're just starting out in the world of credit. These dealerships are signed up with many subprime lenders that can often help people who have little to no credit. These lenders work by verifying other information about you, instead of just looking at your credit history. These things include looking at your income, job stability, living situation, and personal references to help get a better sense of whether or not you can handle a loan.
- In most cases, lenders will require that you have a down payment, especially if this is your first car loan. While down payment requirements vary by lender, the general minimum is either $1,000 or 10 percent of the vehicle’s selling price, whichever is less. Keep in mind that the higher the down payment, the better off you’ll be, as a down payment lowers your monthly payment and the amount of interest you’ll pay over the term of the loan. Use our auto loan monthly payment calculator to see what different amounts used for a down payment can do to your overall loan cost.
Building Credit History
Like it or not, it's not easy to finance a vehicle without credit but don’t let that get you down. In the meantime, work on building and maintaining a solid credit history. A thin credit file makes financing difficult, so building your credit now will help you get closer to getting financing on your own later.
- Become an authorized user. The best way to build credit at a young age is to become an authorized user of a parent or guardian’s credit card. When you do this, you could be issued a credit card in your name, which you can use, but aren’t legally responsible for paying. Since your aim is to build credit, responsible use and coming up with a payment plan with the primary cardholder is a great idea. It also helps if the person you’re pairing with has had the credit card account for a while, regularly uses the card, keeps their credit utilization low, and pays their bill. The key to making sure this all helps you is making sure that the credit card company reports authorized users to the credit bureaus. Without the three national bureaus – TransUnion, Equifax, and Experian – reporting your authorized credit status, your thin credit file won’t bulk up.
- Get a secured credit card. Now that you're 18, you can apply for a credit card. However, just like it can be difficult to get a car loan without a credit history, it can be difficult to get a line of credit without proving your credit chops. The solution to this is a secured credit card. This type of card requires you to make a deposit, which becomes your credit limit. The minimum is typically around $250 - $500 required to open a card. There are many options in this day and age, so you can often research cards online, or see what options your bank or credit union may have. Also, keep in mind that you must maintain your card by paying your bill on time and in full each month, or a credit card can quickly become a spending curse as opposed to a credit-building blessing.
- Have Rent Payments Reported. If you're a renter, you can sign up for a service that reports your rent payments. This gives you the credit you deserve, as rent is a large expense to manage. Sign up with our trusted partner for free to have your rent payments reported.
- Get a Small Loan. Taking out a small personal loan, student loan, or credit-builder loan gives you a chance to successfully tackle an installment credit account. While some of these may be tougher to qualify for than a credit card, you could ask a parent or guardian to cosign for you.
The Bottom Line
You won’t be able to walk into a dealership, get a loan, and drive off in your car if you have little to no credit history, usually due to credit or income restrictions. The good news is that you can get a car loan at 18 if you know where to look. What you’ll need to do is do a little research and planning as an 18-year-old trying to get a car loan with no credit.
Don’t be discouraged if you have no credit history at a young age. It just takes a little time and the right opportunity to begin building your credit. In fact, an auto loan is a great way to do this if you find the right lender. There are lenders willing to work with you, but we know that finding one of them can be a challenge on its own. Fortunately, we can help you navigate this challenge.
If you’re in need of a reliable vehicle and a dealer willing to work with you, Auto Credit Express wants to help. We work with a nationwide network of auto dealers that are connected to subprime experts who know how to handle credit situations like no credit or bad credit. All you need to do is fill out our auto loan request form. It’s free of cost and obligation, so get started today!