No Credit Car Loans… Helpful? Or a hindrance?
Believe it or not, having no credit is an actual condition, defined according to actual criteria in the lending industry. Your credit scores define your credit rating, that is, if you have perfect credit, or no credit, and everything in between. Sometimes, people confuse bad credit with having no credit, but the two conditions are separate and distinct. With bad credit, there is still a good a chance to get, for instance, to get a car loan. With no credit, there is almost no chance to get financing for a car. And, where is a chance, no credit car loans come with some very strict conditions to protect the lender from the strong possibility that you’ll fail to pay that car loan off.
Bad credit ends and no credit begins in the score range of 550 to 540, which is a point where most lenders will automatically deny a car loan application. When lenders see credit scores this low, they make assumptions about how you got there, and their assumptions are usually correct. In order to get scores this low, you would’ve had to have, at least, one credit account go into collections. This is an indicator that you defaulted on a loan forcing the holder of the account to sell the debt to a collection agency. Other causes would’ve involved a charge-off, that is, your account would be so delinquent that a creditor simply wrote your debt off as uncollectable. The creditor can still make attempts to collect on the debt. But, they’ve put your debt into the uncollectable pile in order to take a tax deduction for that debt. A charge-off is about the most adverse entry you can acquire in your credit history. It also sends up the biggest red flag to a lender.
No credit car loans are an almost impossible product to find, and an expensive one when you do. Very few banks will approve a loan to someone with no credit, especially your own bank – they know you too well. Most other car loan companies will deny a no credit car loan application if there is more than one instance of collections or charge-offs. Others may offer last chance car loans, but these come with strict conditions to better guarantee that you pay off the loan, or give up the car. While very few lenders want to be in the used car business, there are certain car dealerships who have no credit car loan programs.
The car dealerships that deal with no credit car loans are known as Buy-Here/Pay-Here dealerships. Unlike manufacturer authorized dealerships, which are essentially a franchise business, BH/PH dealerships are independently owned, stock their own inventory, and finance their vehicles directly. All financial activity is done entirely within the business. Other car dealerships use a number of banks and manufacturer backed financing to make fund their auto loans.
At a BH/PH operation, all cars are owned by the dealership. These are exclusively used cars and, because the stock is owned, outright, by them, they can finance directly through the business. The liability of collecting on the debt falls to them, and no one else. All the business you’ll do with them will be conducted in person including negotiating over car price, delivering payments, etc. Since banks, or other lenders, are not involved in the process, your payment activities will not be recorded for any of the credit reporting bureaus. This presents a bit of a problem if you’re trying to use the loan as a means of improving your credit scores as there’s no information being entered into your credit report to trigger an upswing in your scores. However, this may be your only opportunity to get a replacement car with any reliability, or the support of a dealership’s maintenance department.
Car loans through a BH/PH operation require a minimum down payment, so be prepared with some money to meet this requirement. Interest rates are much higher than those offered to people with decent credit, and all of your vehicle choices will be used. This doesn’t mean your forced into buying a rust-bucket. Most of these dealerships take good care of their inventory. It’s only good business to keep their cars clean, and in good running condition if they’re going to expect repeat business. How they maintain their stock is a good indicator as to whether they fit you with a reliable car at a good deal. Their cars seldom come with warranties beyond what local, and federal, laws demand. But, maintenance warranties can be worked out to protect you from any major repairs should they come up. This sort of extended warranty may cost money. But, depending on the car you buy from them, they may be able to throw in a maintenance plan.
With no credit, the other alternative is to buy a car outright. This can be done through classified ads or at auction. Police auctions are, typically, held one a month and can feature some incredible bargains. The trouble with buying from auction, or from a private party, is that any car purchases are made “as is”. Your car only has you for maintenance support and, should there be a catastrophic mechanical problem, you’re on the hook to repair it. This may not be a bad deal if you enjoy tinkering with cars. But, it can leave you in a deeper hole with a car that doesn’t run.
If you have no credit, try to put off a car purchase until you can support financing for a vehicle that is actually worth your money. While there are lending companies with no credit car loan programs, they are extremely expensive, with high interest rates, minimum down payment requirements, and high lending fees. Unless you have a good income, trying to support the monthly payments of a no credit car loan can break your budget. It’s an expense you don’t need until you’ve fixed your credit. But, though it’s an expensive burden, a traditional car loan can help improve your credit rating.
If you’ve found yourself up against a wall for transportation and have a lender with a no credit car loan program who’s willing to approve financing, you’ll experience a small drop in your credit scores – not a big deal considering where you’re at now. As the loan progresses while you make all of your monthly payments on time, your scores will show some improvement. If you complete the loan successfully, your credit scores will show an increase high enough to move you out of the no-credit territory – if you weren’t too far below the 550 mark. In any case, with that one lender, you’ve built a reputation, which can motivate that lender to finance your next car loan with better, less expensive, conditions.
The number of lenders out there with no credit car loan programs is small in proportion to the entire car finance industry. But they do exist and advertise aggressively, as do dealership financing programs, with marketing aimed directly at rebuilding credit. Like any other business, there are good an bad lenders and you must shop carefully before selecting one to work with. Federal Auto Loan can help demystify the no credit car loan process by connecting you with a nationwide network of affiliated lenders and car dealerships.