What do you do if you need a car and you don’t yet have a track record to make a dealer confident you’ll be able to repay a car loan?
Phil Reed, senior consumer advice editor for consumer auto site Edmunds.com, said a surprising number of people who aren’t sure of the answer to that question go to dealerships and essentially say, “Hi, I have no credit, and I want to buy a car.” It’s not an approach he recommends.
Instead, he suggests trying to get pre-approved for a loan before walking through the door. But even that could be more complicated than it seems. “You have to choose the right car and the right amount (to borrow),” he said. What you are looking for is reliable transportation you can afford. So your initial shopping may start at your computer.
If you have a relationship with a bank or credit union, Reed recommends starting there to look for financing. Particularly if you have a “thin” or nonexistent credit file, he advises trying to get an in-person appointment — and bringing pay stubs and any bank account records with you. “Make a case for yourself,” he said. Edmunds recommends putting at least 10% down on a used car. In addition to reducing the amount you’ll need to borrow, it shows the lender some commitment on your part. (A trade-in could also be used as a down payment, Reed notes.) We also advise checking your credit reports, if they exist, and credit scores. You want to know as much about your credit profile as a lender would.
Reed said that even though a dealership may well be able to beat an offer from your bank or credit union, if you have that loan approval, you needn’t worry about whether you can get approved. You already know you can be — now you can compare rates or negotiate as a cash buyer, focusing on price. You don’t want to feel so indebted to the dealer for “giving” you a loan that you fail to negotiate on the price of the car, he said. And if the dealer’s financing isn’t any better, you have an approval in your pocket.
Reed said it’s important to be confident the car is affordable to you even if it’s not the car you’d choose if you had more money and better credit. “If you have no credit, it’s not time to get your dream car,” he said. “You can move up later.”
He also cautioned that the interest rate you’re offered may seem appallingly high, but that may be part of the cost of not having much of a credit history. He said that if a car buyer is paying on time and building credit, refinancing is a possibility. He said a former dealership employee told him he once saw a customer decrease his interest rate from 13% to 2% in two years’ time, by improving his credit and refinancing. (You can check your credit scores for free every month on Credit.com to track your credit building progress.)
That’s one reason he advises biting the bullet and paying a higher interest rate over getting a co-signer. Co-signing will involve checking someone else’s credit and using that to qualify (it might get you a lower rate — or might not, depending on their credit score). It will tie their credit profile to the way you repay your car loan. Reed said if you’re going to do it, it’s pretty much a last resort, and it should be a relative. Bottom line, though: “It’s asking a lot.”
Better, he says, to finance the car yourself and pay on time, which will help build your credit. That way, you won’t have to go through worrying about whether you’ll qualify for a loan next time.
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This article originally appeared on Credit.com.