By Nayiree Sarkisian
If you’re in the market for a new or used car, and you have little to no credit history, don’t worry – you’re not alone. A lot of people find themselves in this situation, and there are plenty of ways to get around it. To better understand what financial factors need to be considered prior to purchasing a car, especially if you’ve asked yourself “can you finance a car with no credit?”, we interviewed Nicolle Smith from Watchdog Automotive – a leading auto broker in Northern Colorado. “My focus is sub-prime financing. I help people with less than perfect credit, people with no credit, people re-establishing their credit trying to get into vehicles with lower rates and little to no money down.”
“I think some of the biggest concerns women have are probably being taken advantage of,” Nicolle continued. “That can look like a lot of different things like being price gouged, being forced to make a higher down payment than necessary to secure a vehicle, being sold a vehicle that’s not mechanically sound, or being written at a higher APR. I think those are a lot of the women’s concerns, and I think they’re rightfully so because I’ve seen it happen.”
One of the first things you’ll need to do before financing a car is to find out about insurance. It is crucial to know if you will need full coverage on a used financed car – and how much it will cost per month. In most states, you’ll need at least liability insurance, which covers damage to other people and property in an accident while other states may require full coverage, which protects your vehicle in case of an accident or theft. “In the state of Colorado, when you finance a vehicle, you have to carry full coverage insurance. That’s a lot more costly than liability and people don’t take that into consideration either,” Nicolle shares.
The cost of insurance can vary depending on the make and model of your car, as well as your driving history. It’s so important to factor in the cost of your insurance per month alongside your monthly car payment because as Nicolle says, “I’ve seen insurance payments, monthly payments, higher than car payments so that’s a big factor that a lot of people don’t think about.”
Another thing you need to consider when financing a car is your APR, or otherwise known as, annual percentage rate. This is the amount of interest that you’ll be charged on your loan. Your APR will depend on several factors, including your credit score, the type of loan you’re applying for, and the length of your loan term. “APR is a huge part of your payment,” Nicolle says. “Somebody with good credit can get 2.9%, you’re looking at $16 to $17 for every $1000 you spend. That’s kind of a rough way to figure out your payments. Somebody with 21% is spending between $21 to $25 for every $1000 they’re spending. That’s how you know your payments are going to be much higher.”
In general, the higher your credit score, the lower your APR will be. If you have bad credit, you may be offered a high-interest rate, which could make it difficult to afford your monthly payments. “On top of that it’s going to take you a lot longer to pay the vehicle back and (you will) spend a lot more money,” Nicolle says.
A big factor many wonder about when financing a car is the down payment. A down payment is the amount of money you’ll need to put down upfront, and it’s usually based on the total price of the car. The larger the down payment, the lower your monthly payments will be. However, not everyone can afford to put out a large down payment. While a downpayment is helpful to lower your monthly payment, it doesn’t always have to be mandatory depending on your credit situation. Nicolle says “I can get you approved with no money down – and you know, that again depends on the credit or lack thereof.”
“Some people think that they don’t have any credit, but they have bad credit because they have collections they are unaware of,” Nicolle continues. “That’s a different situation than somebody that we would consider a ghost, one who has no credit at all, no negative or positive. Those are situations that I would need some kind of down payment to get you approved. If you have negative credit and no positive credit then there are situations where I would need a down payment,” she affirms. “If you’re a first time buyer that has a credit card and has paid that well, there are situations where I can get people approved with $0 out of pocket.”
To learn more about credit and how you can raise your score, read our review of Credit Karma here
Leasing vs Financing
Leasing a car versus buying is another important consideration when purchasing a car. With leasing, you’re essentially renting the vehicle for a set period of time, and at the end of the lease, you have the option to purchase the car or return it to the dealership. Financing allows you to keep the car after making all of your payments, while also providing a buyer with more options. Nicolle states that “leasing is a lot harder to do than financing.”
She continues on to explain that “if you are a first time buyer and your score is under normally 650, you don’t qualify to lease.” Further adding on the topic, she shares that “leasing is good for people who like to change out of their cars every 2 to 3 years” whereas “people that finance, that like to switch out of their cars every 2 to 3 years, can run into having negative equity depending on what gas prices are, what your credit score is, and depending on what kind of vehicle (make and model) that you have.”
“Depending on the vehicle, you more than likely will have negative equity that you would be rolling into a new loan. So if you have good enough credit, it makes sense to just lease a vehicle. However, when it comes to financing, “if you have a lower APR, it’s more than likely you don’t have to worry about having so much negative equity or any at all. When you have a higher APR, that is what makes it tough,” Nicolle says.
When financing a car, it will be common for dealerships to give you a pre-approval, but Nicolle says to be wary of this. “The first alarm is when they say you’re pre-approved within an hour and they’re having you come down. Don’t believe them because it takes some time to get a pre-approval for a first time buyer.” She continues, “When I worked in the dealerships, we were trained to get people in the door.”
If you’re looking to finance a car with little to no credit, there are plenty of options available to you. Just be sure to consider all the financial factors we’ve discussed before making any final decisions. Nicolle leaves us with her last bit of advice, “The internet has changed the car industry, so you have it all available to do your research on what kind of vehicles you’re looking for, what safety features you need, and weed out your needs and wants. Look into your budget, when it comes to maintenance on a vehicle, how much that will be, if that’s going to be difficult and the insurance part. That’s a big part.”
Nicolle lets us know that she does serve clients nationwide. “I can take care of your pre-approval and send you a vehicle no matter where you are.”