Auto Loans for People With Little Credit History

Your credit score depends on several factors, and one of those factors is how long you have had credit. According to FICO, an organization that tracks credit scoring, at least 15 percent of your score depends on the length of your credit history. If you have a short credit history, though, you do have options for auto loans.

Co-signer

When you use a co-signer, the lender can use the co-signer's credit to make a decision on your loan. If you are unable to make your auto loan payments, the co-signer would be held accountable. This option has drawbacks, however. If you always use a co-signer, your credit will not grow as quickly. Using a co-signer on only your first auto loan can help you build your credit to the point where you can obtain your next loan without a co-signer or refinance the current loan on your own.

Large Down Payment

Place 20 percent down on your new car. If you default, you will not recover this sum, making the loan riskier for you but less risky for the lender. By making a loan less risky to the lender, you can persuade that lender to extend your loan despite your short credit history.

Collateral

You have the option of using additional collateral on your auto loan. For example, you can use stock certificates, a savings account or home equity to obtain a loan for an automobile. Most auto loans are secured with the car itself; if you default, the lender seizes the car. By adding additional collateral, you give the lender the option of seizing more assets in the case of your default. This makes the loan less risky for the lender. However, this is additional risk on your part, and you should not enter this type of agreement lightly.

Seek High-Risk Lenders

Banks tend to be the most traditional lenders; this means they steer from very high-risk loans due to regulatory guidelines. Lenders outside of these standards can be more lax. Car dealers often have additional incentive to issue loans because they would like to profit on the sale of the vehicle. If your car dealer will not finance you, though, you still have more options. You can seek no-credit loans. Lenders offering these options engage in high-risk debts in order to charge higher interest and fees. While these loans are more costly, they can give you options when traditional financing will not work.