New or first-time car buyers are often surprised at being turned down for a car loan because they have no credit history, which unfortunately has about the same effect as having bad credit. Getting a co-signer might be the answer.

Lenders want to see that a borrower has a good record with previous loans and credit cards. Without a history of credit, a borrower represents a risk to lenders. If they don’t know a borrower’s history, they take the low road and assume the worst.

It’s a familiar “catch-22″ situation in that you can’t get a loan to establish credit without already having credit. So what is the answer?

What is the answer?

The most common solution is to have someone “co-sign” your loan contract. Typically, it’s family member who has a good credit score. A co-signer plays no part in the loan unless the primary borrower fails to make payments. In that case, the loan company would have the right to seek payment from the co-signer.

A co-signer does not share ownership of your vehicle. If you pay off your loan on time and without problems, the co-signer has no further role, rights, or responsiblities. Their job is finished.

Even if you default (fail to pay) on your loan and the co-signer has to step in and make payments, he/she still has no owership rights. The car would still be in your name. Many people who co-sign do not understand this important point.

Another point that is important for co-signers to understand is that a co-signed loan or lease shows up on both the borrower’s credit report and the co-signer’s as a financial obligation or debt. This may affect the co-signer’s ability to get a new loan or lease for themselves if they are already close to being over-borrowed. It increases their “debt load” which is a factor that is considered when one applies for new credit. Both you and your co-signer should know your credit score before you apply for a car loan. You can get your most recent credit score online at FreeCreditScore.com.

However, on the postive side, if you pay off your loan with no problems, both you and the co-signer benefit from the good credit report. Both you and the co-signer will improve your credit scores. This makes having a co-signer a great way for someone with no credit to begin building a good credit history.

Selecting a co-signer

You should take care in selecting a co-signer. Since approval of your loan will depend on their credit worthiness, the person should have a strong and healthy credit history, a steady source of income, and not have excessive debt. For most new car buyers, this will probably be a close family member.

If you have already shown a history of financial irresponsibility, you may have difficulty finding someone who is willing to assume responsibility for your new obligations. Like the banks or loan companies, your potential co-signers may not want to take on the added responsibility and credit debt load. If the co-signer is not able to take over payment when the primary borrower defaults, both the borrower’s and the co-signer’s credit score are damaged.

If you can’t find a co-signer

If you can’t find someone who will co-sign for you, you have few other options. You may have to work out your transportation needs another way while you save enough money to get started with an inexpensive used car, while building your credit history so that you won’t need a co-signer the next time. Get a couple of credit cards or department store cards, use them often, and pay them off each month. You can then watch your credit score improve with a monitoring service such as FreeCreditScore.com.

You could also borrow cash from friends or family, although this method doesnhelp you build a good credit history. In many cases, you may not need the entire amount to buy your car. Often, a large down payment will allow you get a loan even with no credit or bad credit. A smaller loan presents less risk to a lender, and could allow you to be approved.

You could also try a used car dealer who specializes in working with people with bad credit, such as Drivetime.com. They have 78 locations around the country and offer a wide selection of used cars. This type of dealer its their own loans, which means it won’t help — or hurt — your credit.

Summary

Getting a co-signer is a great way to start building your own credit history. If you make your payments on time, don’t skip payments, and don’t default on your loan, you’ll be in great shape for your next loan — without a co-signer.

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Having bad credit means that sometime in your past, possibly as far back as seven or ten years, you have had missed or late loan payments, repossessed property or cars, or have declared bankruptcy. You may also have an excessive number of credit cards with high balances. These factors are included in your credit history reports that come from three credit reporting agencies: Transunion, Experian, and Equifax.

Your entire credit history is summarized in a single number, called your credit score.  You can see your most recent credit score online with a simple sign-up at FreeCreditScore.com .

Your credit score determines if you’ll get approved for a car loan, how much you’ll in interest, how much down payment you’ll pay, and even how much you’ll pay for auto insurance.

Credit score range from 300 to 850. A credit score less than about 680 is generally considered by most lenders to be “poor” or subprime credit.

How Bad Credit Affects You

Very few things in life can have a more devastating effect on your lifestyle than a poor credit score. A low credit score can cost you hundreds or even thousands of dollars per month.

Credit Cards

Most prime credit cards are entirely out of reach to consumers with bad credit. And the few credit cards that are available to them (known as “sub-prime” cards) typically require exorbitant setup fees or recurring monthly fees, offer very low credit lines, often require cash deposits, and in most cases do not even report your positive credit activity to the credit bureaus.

Automobile Financing

If you are making payments on a car, you are probably paying between $5,000 and $9,000 more just for having bad credit. This added interest shows up every month in a higher payment. Take a look.

What to do

Of course, the most important thing to do is start working on repairing your credit. However, you shouldn’t expect instant results. Meantime, you may have accept loan rejections, or having to pay high interest rates and make large down payments until your credit score gets better.

Getting a family member to co-sign with you on your car loan is the most common way to circumvent some of the problems of bad credit. A co-signer is not a co-borrower as a husband and wife might be. The co-signer is only there to make payments if you stop making payments yourself. The loan is yours and remains yours, even if the co-signer has to pay. Getting a co-signer is a great way to avoid some of the problems of poor credit, and gives you some time to build your credit back by making your payments on time.

If you can’t find a co-signer, you can look at buying your car from a dealer who specializes in working with people who have bad credit, such as Drivetime.com. They have over 78 used-car locations around the country and have a wide selection of cars to choose from.

Also check with a reputable online car loan company such as CarsDirect that provides car loans to people with no credit or poor credit.

Repairing Credit Yourself

The Fair Credit Reporting Act gives you the right to dispute any and all items on your credit reports that you feel classify as inaccurate, unverifiable, or misleading. If the bureaus can not verify that the information on your reports is indeed correct, then those items must be deleted.

Disputing items on your credit report is easy. Getting results from the credit bureaus is amazingly difficult, complex, and infuriating. It is not a coincidence that the Federal Trade Commission receives more complaints against credit bureaus than any other type of business. Remember, the credit bureaus are primarily interested in protecting their profits. Investigating your challenge consumes these profits. Short of sparking a mass number of lawsuits, the credit bureaus seem to do everything in their power to discourage consumers from making progress in their restoration efforts.

Restoring your own credit is like repairing your own transmission or representing yourself a court of law; it is possible, but you must decide if you are willing to take the time and assume the risks of doing it yourself. Most people get a professional company or attorney to help them.

Summary

Buying a car with bad credit is possible but your choices may be limited. You could be refused if you credit is bad enough, or you could be required to pay a high interest rate and/or make a high down payment. Getting a co-signer is often the right solution. It not only allows you to get the loan at a good interest rate, but also helps you improve your credit score.

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Whenever you apply for any type of credit or financing, a credit report is pulled from at least one of the three major credit bureaus. While there are hundreds of smaller credit bureaus around the country, virtually every credit bureau is affiliated with Trans Union, Experian, or Equifax.

These credit bureaus collect and maintain information on the vast majority of Americans, but they are not affiliated with the government in any way. The credit bureaus are for-profit corporations that sell your personal information for money.

Credit reports are not just a record of how you are currently managing your credit accounts. Credit reports are histories of everything you are doing with your credit now, and everything you have done in the past. The credit bureaus collect this information, list it on your credit report, and then sell it to credit grantors who wish to see your credit history before they decide to lend you money.

The credit grantors who review your credit are especially interested in any negative credit. If you have shown any tendency to pay late, or to disregard your financial commitments in the past, then the creditors’ computers will immediately reject your application. Just like when you were in grade school, your credit report is your financial report card to the world.

What Kind of Information Appears on the Credit Report?

Can I See My Credit Report?

Most credit grantors are not allowed by the credit bureaus to show you your own credit report. But you can purchase your credit report from the credit bureau for a fee. You are actually entitled to get a free copy of your report from each of the three credit bureaus once a year (AnnualCreditReport.com), but you don’t get your all-important credit scores.  You can get your free credit score from FreeCreditScore.com that you can view instantly with a quick signup.

With the passing of each year, your credit report is used more and more often as a yardstick to measure your character. Prospective creditors will always review at least one of your credit reports before granting you credit. Today it is increasingly common for insurance companies to review your credit before extending auto or health insurance. Many employers now check credit before they consider you for a position. If you rent, you may have already been through a credit check to determine your worthiness as a renter.

You can get your free credit score from FreeCreditScore.com that you can view instantly online with an easy signup.

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Is your credit score average?

Even when you find out your personal credit score, most people wonder how they stack up with other consumers. What’s a good score? What’s bad?

First, let’s understand that you don’t have just one credit score. There are three credit bureaus in the United States – Transunion, Experian, and Equifax. Each has it’s own data about you and your credit habits. Each also has a slightly different formula for creating credit scores, that all-important number that summarizes your entire credit report.

Your score is almost certainly to be different between the agencies because of the ways in which the score is computed. Lenders and car dealers typically look at only one of the scores but there’s no way you can know in advance which one it might be.

You can get each of your individual credit reports and scores at Equifax at Transunion, and at Experian. 

Credit scores range from 300 to 850. Most people are in the range of 600 to 750. To qualify for the best loan interest rates, you’ll need a score of 680-700 or higher, depending on the lender. Any score below this “prime” level is considered “subprime.” Mortgage lenders have recently gotten themselves in trouble by providing too many high-risk subprime loans.

The national average FICO credit score is about 680. 

It may be a surprise that average scores vary widely by state.

Midwestern and Northeastern states tend to have the highest scores, with South Dakota having the highest at 710. Other states with average scores above 700 are North Dakota, Vermont, New Hamshire, Minnesota, Montana, Massachusetts, and Iowa. States with the lowest average credit scores include Texas, Nevada, Louisiana, and Arizona. Texas has the lowest at 651.

Factors that can damage your credit report include late payments, insufficient credit references, high credit card balances, and bankruptcy.

The first step to improving your credit score is finding out what it is — from all three credit agencies. Get both your detailed credit report and your credit score. Then take the necessary steps toward a better credit score. Make payments on time, reduce outstanding debt, and correct any errors that might be in your credit reports.

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The answer? Yes, under some conditions. Let’s explain.

It is a common situation, especially with young people who have never had a loan, never had credit cards, or never borrowed money for a car. Without a history of prior loans and payments, there is no credit history and no credit score, which is the number that represents credit rating.

In fact it is not quite sufficient to simply have a good credit score to get a car loan — or any loan. You may also need to have an established steady income (a job) and no excessive debts. You should have no recent bankruptcies or auto repossessions, which you wouldn’t be likely to have anyway if you have no credit.

So how is it possible to buy a car with a loan when you have no credit record and no credit score?

Buying a car with no credit is only possible if you pay cash, or if you get a loan from family or friends — or if you have someone who can co-sign with you on a loan. Having a co-signer is the most common way that most people buy a car with no credit.

A co-signer is not a co-owner. The loan is in both names but the car’s title is only in the name of the primary borrower (unless he wants both names on the title, which is typical for a husband and wife). Only if the primary borrower defaults (misses payments, or stops payments) does the co-signer take over. Even then, the co-signer only makes payments. The car still belongs to the primary borrower, even though the co-signer pays. The co-signer assumes no owership or equity in the car, even if they made most of the payments.

It is also important to know that both the borrower’s and co-signer’s credit are affected negatively if neither can make payments and the car is repossessed.

If you have no credit, having a co-signer on your car loan is a great way to build credit and establish a positive credit history for the next time you need a loan to buy a car.  Just make sure you make all payments on time and don’t miss payments. It also helps to get two or three credit cards or department store cards but don’t apply for them all at the same time. Spread out your applications over a period of three months or more. Charge to the cards frequently. Pay off most of your balance each month.  Make payments on time and keep low (but not zero) balances.

If you want to buy a car with no credit, there are some solutions, the best of which is to have a co-signer. Without a co-signer, you are very limited in your options. Make sure your co-signer has a good credit score or you’ll be turned down. Your co-signer can get his/her most recent credit score online at FreeCreditScore.com. It’s free with a simple registration.

Try a reputable online car loan company such as CarsDirect that specializes in providing car loans to people with no credit or poor credit.

You could consider a special type of used car dealer, such as Drivetime.com, who has locations all over the country, and provides their own loans to people with no credit or poor credit.

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