Can You Get an Auto Loan With New Credit?

Auto loans are useful because most cars cost thousands of dollars and consumers tend to spread out the expense with several years of payments. You can get a car loan more easily with an established credit history than with new credit because banks and finance companies like to see an established pattern of how promptly you pay your obligations.

Definition

You have "new credit" when your accounts are less than a year or two old. An established credit history consists of credit cards and loans that date back several years and different account types that include revolving credit lines and installment loans. According to the MyFICO.com website, the length of time you have used credit is an important part of your score. It takes time for people who have just reached adulthood to build up their histories to a useful level.

Challenge

You must have credit in order to get more accounts, according to information on MSNMoney.com. Vehicle loans are typically for several thousand dollars, so many lenders shy away from car buyers without several years of established credit. Such people face a challenge in building up their histories because other creditors look for previous account records, too, reports MSNMoney.com.

Solution

The MSNMoney.com website lists several options for people who are just starting out financially and want to build their credit histories so they qualify for auto loans. Secured credit card companies give people cards in exchange for a deposit that guarantees repayment. These cards are a common way to establish new credit because almost everyone qualifies for them, and banks usually switch them to a regular account after 12 to 24 months of good payment performance. Stores and gas stations may also extend credit to people without much history.

Alternative

You can easily get an auto loan with new credit if you find a co-signer who has an excellent, established credit history. Your co-signer is equally responsible for repayment, according to information on Bankrate.com, and the car loan shows up on that person's credit report as well as yours. You hurt their good standing if you stop making making payments. Their credit is badly damaged if you default on the contract and let the car get repossessed, so only use a co-signer if you know you can handle the loan.

Warning

Lenders and dealers sometimes take advantage of car buyers with new credit. They charge high interest rates and include penalties for early repayment in their contracts so buyers cannot refinance the loans with another company at a better rate later. According to Edmunds.com, look for your own loan before shopping for autos. Get pre-approved with your current bank or credit union or check online car-financing websites.