Understanding Auto Loans: Do You Need Credit to Buy a Car?

Cars today can cost tens of thousands of dollars, even if you buy used. Coming up with the cash needed to cover a car purchase in full can sometimes be a bit complicated.

If you can’t pay for a car in cash, you’ll need to borrow money through an auto loan. But what if you don’t have an established credit history or credit score? Do you need credit to buy a car?

We’ll cover everything you need to know about buying a new car if you don’t have credit. You’ll find out what credit is, whether it’s needed to buy a car, the documentation you may need to provide your lender during the application process and what financing options are available if you have no credit. 

What is credit?

Credit is the ability to borrow money from a lender or get access to goods or services with the understanding that you'll pay it back at a later date. You’ll generally see “credit” expressed in three different ways:

• : This is your track record of how you use money, including accounts that you’ve opened and payments you’ve made.

• : This is a document that contains your credit history. There are that host credit reports — Equifax, Experian and TransUnion.

• : This is a three-digit number used to determine your creditworthiness. It essentially summarizes the information on your credit report, making it easy for lenders to determine how responsible you are with money. The higher your score, the better. There are two primary credit scores: FICO Scores and VantageScores.

Being responsible with borrowed money and establishing a strong payment history (by making monthly payments on time and in full) can come in handy when you try to secure lending down the line. 

Borrowers with bad credit scores tend to have , if they’re approved for lending at all. Lenders typically reserve lower interest rates for borrowers with .

Do you need credit to buy a car?

Technically speaking, you . There is no industry-wide standard that states car buyers must have a minimum credit score to secure an auto loan. This is different than, say, a mortgage, where you would likely face minimum credit score requirements.

Requirements for car loans very much depend on the lender. There are even auto lenders that cater to those with poor or no credit. 

But, as mentioned previously, the loan terms may not be all that favorable, and you may be required to:

• Pay a higher interest rate

• Secure a — someone with strong credit who is willing to put their name on the loan to vouch for you and is obligated to make payments if you fall behind on the loan

• Put down a higher upfront, which increases the equity you have in the car and reduces your total loan amount (i.e., the amount you need to borrow)

Additionally, your lender may require you to provide other types of documentation if you do not have a credit profile. Without credit, the lender has no way of knowing the likelihood that you’ll repay the loan.

What documentation will you need to buy a car if you don’t have credit?

If you don’t have any credit, your lender may require you to provide other information with your loan application. Typically, a lender would perform an inquiry on your credit profile to view your score and history. But, since you don’t have any credit, the lender may request additional documentation. This could also be the case if you have poor credit.

You’ll likely need to display proof of income to your lender. This can come in the form of:

• Pay stubs

• W-2s

• Tax returns from previous years

Your lender may also request to see a list of your and . By asking for this information, your lender is evaluating whether you have enough cash on hand to make on-time payments in case of a situation like job loss.You can provide this assurance by offering bank statements. 

Other information to be prepared to present during the application process includes your driver’s license or passport and potentially proof of residence. 

Furthermore, if you are interested in a trade-in, you’ll need to bring the title to your current car and proof of insurance.

Who do you finance a car through if you don’t have credit?

If you don’t have credit, you may need to work with certain lenders for your auto financing needs. A quick internet search for “auto lenders ” can yield the lenders in your area who may be willing to work with you.

As mentioned previously, you may need to provide additional information to secure your loan, such as proof of income or a greater down payment. Additionally, these lenders may have stipulations about which car dealers you’re allowed to purchase from. They may have specific dealerships they prefer to work with, and you may only be permitted to purchase from one of those dealers.

You can consider asking your lender about special financing offers. For instance, some lenders may have special offers for students or , as they are individuals who still need to build credit but also need a vehicle to start their professional careers. In these cases, your lender may even request to see things like your GPA to make their lending decision.

One last type of financial institution you can consider is a . A credit union may be more willing to work with you for automotive lending than a typical bank or a car dealership. 

They even offer Credit Builder Vehicle Loans, which can help you build credit while making your car payments. However, you may need to join the credit union to gain access to this type of financing, which could require you to pay a membership fee.

One of the particularly important things to remember is to compare offers between lenders. Lenders can often run — which don’t harm your credit score — and offer an indication of the type of loan you’d be approved for. 

Shop around for favorable rates and loan terms. You also don’t need to accept dealer financing. Working with a third-party lender can ensure you find the right deal for your financial situation.

Be mindful of your credit when purchasing a car

Whether you’re purchasing a new or used car, it’s important to be mindful of your credit. 

Do you need credit to buy a car? Technically speaking, no. There are no credit minimums required to secure lending for an auto loan. However, you’ll likely find that those with higher credit scores receive the ideal interest rate and loan terms. 

If you have poor credit — or no credit at all — there may still be lenders who are willing to work with you. These lenders could carry stipulations though, such as requiring a larger down payment.

If you’re currently carrying credit card debt and worried about maintaining a good  credit score, †. Tally is a credit card payoff app designed to help qualified users manage their credit card debt, so they can gain control of their personal finances.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.