If you don’t use credit or just started building it, chances are you have no credit file or maybe just a thin one — it’s there, but there’s not much to it. That can leave you with a low credit score or no credit score at all, which may make it difficult to get credit when you need it.
A thin credit file is a common obstacle consumers encounter when trying to buy a car. The vast majority of American households have a car and people overwhelmingly rely on their cars to get to work, but unless you have the cash to cover the cost of your next car, you’ll need to finance it. It can be tricky to get an auto loan with an interest rate you like when you have no or thin credit, but there are a few things you can do to improve your chances of finding affordable financing.
Take Time to Build Credit
If the car isn’t an urgent need but you know you’ll need a new vehicle in the next year or so, start trying to build credit now. One of the easiest ways to build credit is to get a secured credit card, spend very little of the credit limit and pay off the bill on time and in full every month, so you establish a history of on-time payments and responsible use of credit, without going into debt. Before you apply for a card, compare secured credit cards to learn about interest rates and any fees you may have to pay.
If you’re just starting out and have a credit history that’s less than 6 months old, try to remain patient while sticking to the basic behaviors of good credit, like making on-time payments, and give your credit score time to grow.
Find a First-Time Buyer’s Program
It’s not uncommon for someone’s first big purchase — one that needs a loan — to be a car, and there financing programs designed to meet that population’s needs. If you already have a relationship with a bank or credit union, that could help you get financing, too.
“They’re going to look at you just a little bit differently, because they know this is the first time you’re borrowing,” said Yvonne Sambrano, senior lending solutions manager for EPL Inc., a technology firm that works with credit unions.
Auto finance companies have these programs, too, but you may be able to get a lower interest rate if you go to a local bank or credit union, particularly if you’ve done business with them before. Make sure you have as much documentation of your financial stability — proof of income, bill statements, etc. — to make your case to a lender.
Use an Alternative Credit Report
The use of non-traditional credit information has become much more common in the lending world, even within the major credit reporting agencies. Creditors have many tools at their disposal to qualify you for a loan, so ask potential lenders what sort of alternative data they use to assess creditworthiness. You might be able to find a lender that uses a credit score or credit report that looks further into your credit history or considers things like utility payments in making lending decisions.
You could also take the initiative to build a credit report by working with an alternative credit bureau (eCredable is one example) that can help you use payment history on your regular bills, like your rent or cellphone, to get an auto loan.
Get a Co-Signer
When you ask someone to co-sign a loan, you’re asking them to risk their credit standing in order to help you — so you’re asking a lot. Still, if you don’t have many options for financing a car you need, it’s one way to make things work. Remember that if you miss payments on the car loan, you’ll bring that friend or family member down with you.
Any of these options tends to take a little bit of planning, so don’t wait for your current vehicle to die to figure out how you’ll pay for your next one. Even if you know you’ll need to finance some of it, try to save up for a down payment, because that can help you get loan approval or snag lower interest rates, which will save you money in the long run.
Christine DiGangi is the Senior Editorial Director of The Balance. She's also a freelance writer for Pocket Outdoor.